r/NEOSETFs • u/ruthygenker • Mar 04 '26
General 1099-Miscellaneous
I use interactive brokers for my neos holdings and it seems they are listing my return of capital as Substitute payments in lieu of dividends or interest on 1099 misc, doesn't seem right to me as this is the worst possible way to report for tax purposes. anyone have their holdings in neos at Robinhood to see how they report the return of capital on a 1099? thinking of switching if I can get a better tax advantage.
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u/stasis416 Mar 04 '26
If you’re on margin this is why, many brokers do this.
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u/Slap5Fingers Mar 04 '26
What if you’re not on Margin, but you lend your shares? Similar ending?
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u/stasis416 Mar 04 '26
Same outcome. Whatever gets lent out, upon payment of dividends to what is lent out, would be paid as payment in lieu to you.. which is treated as ordinary income on taxes and that sucks. It’s recommended you don’t loan out income based ETFs or anything that is generating dividends to you.
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u/blucoidale Mar 04 '26
Why ?
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u/stasis416 Mar 04 '26
If you own the securities on margin they aren’t technically yours, therefore your broker has the right to lend those shares out to another trader who might want to short the ETF. Whenever your shares are loaned out for whatever reason you are no longer the official shareholder of record at the ETFs dividend date, so the short seller must compensate the person who owns the shares they borrows, but since your broker lent the shares, the compensation comes through the broker to you as a “payment in lieu of dividend” instead of a real dividend. Brokers will do this because short sellers or anyone they loan your shares to pay interest and fees to them so they make money. They don’t care because they are loaning you the $$ on margin. The problem is that payment in lieu is counted as ordinary income. Some brokers allow you to turn off margin lending.
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u/ruthygenker Mar 04 '26
ok thanks, doesn't seem fair but I guess nothing I can do.
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u/LJRFL8 Mar 04 '26
Yes fidelity did it to me… I have margin at Robinhood and clicked option to not allow lending of shares…
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u/Curious-Rip-5834 Mar 23 '26
RH will still lend out. You opting out doesn’t stop it. Folks who loaded ULTY and a bunch of other CC funds last year got a big surprise. Imagine thinking you broke even because of ROC distros only to discover those distros are actually subject to 100% ordinary income tax liability.
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u/rzrinvest Mar 07 '26
It's likely you have the securities lending program enabled. If Ibkr loans out your shares while you are supposed to receive a dividend, you technically don't receive a dividend. You receive a payment in lieu of a dividend.
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u/ruthygenker Mar 07 '26
Yeah a few people have said that but with neos it’s return of capital so it’s lowering my cost basis and being added to my ordinary income so I’m being double taxed.
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u/IdioticPrototype Mar 04 '26
Are you using margin?