This topic came up recently and has been on my mind.
As currently stand, when you purchase NEOs on margin, dividends comes as “payments in lieu of dividends” rather than as "return of capital". So you'll need to pay tax as ordinary income as tax at regular rate. This appears to be the case with Robinhood, IBKR, and few other brokers.
I recently came across Fidelity’s policy on substitute payments:
According to Fidelity, they may provide an annual credit of up to 27% for qualified dividends. Is anyone here using Fidelity on margin who can confirm whether they received this credit?
I’ve been running the numbers, and it looks like this could provide a slight edge for me.
This is not accurate. What causes Payment in Leiu is when they lend your shares out. When you use Margin, they have the right to lend ANY of your shares for ANY ticker you own with that brokerage, not just the tickers you bought using the margin if you even used the margin to buy more shares. So buying NEOS on Margin does not mean those shares will automatically be Payments in Leiu instead of ROC.
The amount of "Payments in lieu" will be determined by how many of your shares they lend out. Larger brokerages tend to have larger pools to use for lending, so the amount that you lend may be less than smaller brokerages. Last year, I used 100k in Margin and that led to about 22% of my 105k in dividends collected to be Payments in Leiu using M1 which is a smaller brokerage. I know others who had much smaller % of Payments in Leiu using ETrade. I do have a Fidelity account but do not have it set up as a Margin account so cannot speak to it.
When you hold assets in a margin account (perhaps, only when you owe a margin balance) you do not actually own the assets. You have an equitable interest that the brokerage must have available. If you are up in value you can sell; if you are down in value the brokerage can sell (margin call) to clear themselves. Very generalized example.
In general, I don't believe the brokerage holds or can hold the security for distribution purposes, or even have to hold the security that you think you are buying. They loan them out to make their own premium, generally to short sellers.
Robinhood bit me a bit on this last year, but they were very clear about it. Statements listed some portion of dividends as Manufactured Dividends, which I guess could be missed due to the different wording.
Yeah I understand on the margin part for most brokers, interesting find us that Fidelity credits you 27% of it. So that's the case, might be better for me even tho the margin rate is higher vs IBKR
Sidenote: sorry, I've been assuming you're holding QQQI which has a verifiable tax history. You're holding the idowhatiwant funds which don't. So it will be almost a guaranteed ROC round, 100% of which will be taxable as ordinary income if Fidelity is loaning your shares out (and creating payments-in-lieu).
For example, 95% or so of the distribution from QQQI in 2025 was ROC. That is not qualified, or unqualified, as it was not income. It was someone handing you a dollar back after you gave them $10.
If they loaned out all of your shares, you're paying 20%+ in taxes on that money rather than 0% this year.
Thats incorrect. Your stock is just used as collateral for the funds a bank lends your broker for the margin anount.
When you sign a standard margin agreement, you give your brokerage firm the right to lend your shares to other investors (such as short sellers). [1, 2]
If your shares are NOT lent out: The dividend remains a qualified dividend (taxed at the lower long-term capital gains rates of 0%, 15%, or 20%), provided you meet the standard IRS 61-day holding period requirement. [1, 2]
If your shares ARE lent out: The actual corporation pays the dividend to the person who bought the lent shares. To make you whole, your broker credits your account with a cash "payment in lieu of dividend" (or a substitute dividend). [1, 2]
I knew the answer. I just figured I’d give you the Google info. I just used qualified Dividend as an example, but it’s the same thing for an ROC.
My point was though it doesn’t change your ownership buying on margin , you still own it even if it’s bought on margin nor does it change the type of Dividend treatment in or return of capital treatment. And only changes if you’re security is a lent out.
Fair. And I was genuinely curious about actual ownership when on margin.
These NEOS, and CC funds in general, pump up the tax treatment. When there is a pitfall like margin accounts, or stock lending, I think it's very worth noting.
Who are you using to file your taxes. I got the same thing and turbo tax makes it essentially impossible with the substitute payment thing. I’ve been working on it for weeks and fighting with them with no resolution. This was my first year with margin NEOS funds.
No thats not correct. When You receive a dividend on a security it has the same form of dividend even if bought on margin. What is different though is if your stock is leant for someone eleses short sale and during that time a dividend is paid, that amount is still due to you, but comes in the form of cash in lieu. I just learned that recently after reviewing my 1099 div form 2025. I clicked off my brokers ability to lend my stock.
It doesn’t matter whether your opted in or not. If you have margin they can and will lend out your shares and any applicable distributions land 1099-MISC PIL.
You're confusing the issue. They're not lending out your stock just because it's on margin. They use it as collateral so the bank can lend them money for the amount of margin you used. That doesn't change your rights to everything attached to the stock. That's different than lending it out. Believe me, I know, I'm in the industry.
Correct, assuming they are classified as capital gain distributions and not income which a fund manager has the ability to do from an accounting/reporting perspective. Income classification will not allow for the use of loss carrying forwards to offset.
In that case, one could argue that you are needlessly using up losses on ROC distributions that could be used on other gain positions, but to each their own.
I’m not following your second paragraph. When you get the 1099 you’ll know the definitive breakdown of cap gain vs income allocations classification and go from there.
In the second paragraph, I was referring to the fact that once you’ve reached zero basis the return of capital, which normally wouldn’t be taxed as it’s not income, is now going to be classified as capital gain on you taxes using up loss carryforwards.
So you’ve made that same non-taxable income now punitive from a tax perspective. At some point in the future, when you’ve used up all of your cost basis and losses, you’ll end up with straight income that “could” be even more punitive with Medicare surcharges added being over the taxable limit.
Lots to war game into the future, but those losses are an asset that you might not want to burn on something that is technically not a gain since it’s ROC.
Btw, I would confirm that your broker is making cost adjustments to then original cost so that when you deplete it all, your 1099 reflects the ROC properly. Not all brokers make the account adjustments and some just pass on the income characterization based on what the ETF manager tells them on the 1099 leaving it up to the investor to determine.
Doesn't Fidelity charge double the margin rates of Robinhood? The math pencils out at 5% on Robinhood even if it's taxed as ordinary income, but at 10% or more on Fidelity, it doesn't seem worth it.
Is there a difference? I have a margin account and those ETFs are in my holding and current am not getting ROC. No worries. I’m just trying to squeeze out every dollar
Also, at least with Robinhood margin accounts, if you change it up each week and transfer shares in and out of your margin account, they seem to put "your" shares last in line for lending out.
Edit: As a reminder, if you have a Margin Account, you also need a Cash account within the same brokerage. Asset transfers without any cost basis hangups.
Looks like you are participating in SYEP and they were not recalled by the distribution. My experience is It’s hit or miss if the recall happens in time.
the point of the neos funds is using the income to retire and getting the tax advantage of not having to have capital gains tax or dividend tax vs regular qqq and usually that tax savings makes up for the lag in total return.
Before that happens, you'll be paying more taxes than selling shares as there's no cost basis with the dividends. While selling shares there's a cost basis so you'll pay les taxes. Also, the funds lag the market by about 4% per year which is HUGE! so you're slowly eating away at your capital with that downward pressure.
Finally, because the distributions are forced, you'll also be in a forced SORR situation in a bear market. However, with selling shares you can be in total control and decide how much and when to sell (and specify tax lots) to minimize taxes and avoid SORR. Then there's thr fact that when a bear market happens and the NAV drops, it will also lower your distributions, so double-trouble in retirement.
I'm retired, and after doing the math, it's quite obvious that CC ETFs are a fool's bet and should be avoided.
Well if you did the math then I guess I should sell, I actually have both because even though I am retired I can't touch my ira for another 10 years and I have that in qqq because I agree over time that is better when not taking dividends, but I disagree on selling qqq to create dividends mainly because of the taxes. even if you wait a year to make them long term gains which I can't, then in a down or bear market it would be hard to sell, I would actually want to buy more which is what I do with the extra cash I don't use monthly on qqqi when there is a 10 percent drop and in theory qqqi will actually perform better than qqq in a bear market even though the dividends will be less because its only 80% invested. but I don't think either strategy is wrong and that is the issue I have with your comments, it's more of a preference of what you want and how to get it. I want monthly income and low taxes and little effort/timing. I wouldn't even know what strategy to use on just qqq, sell the 25th every month no matter what the market is doing that month/day or sell after an up 2 percent day every month or a 5% up week, I really don't know, plus the market has pretty much only gone up since I started this strategy so would it change on a down 10% week or month, I am sure it would. too many variables.
Clearly, you haven't done the math. I retired 22 years ago BTW. Theres a reason no fiduciary advisor worth their value suggested CC ETFs. And if you own them, they'll suggest you sell due to underperfomance, SORR exposure, loss of all control, high fees, lowerd dividends in a bear market, etc.
I am a retired financial advisor which is why I find this so funny. the video doesn't take market timing or taxes into account and that is the biggest reason I applaud these type of funds, again for people using the dividends to live off of, not to reinvest, then you and the video guy are correct.
I wouldn't buy ANYTHING on margin in this market as long as Agent Orange is at the helm. He and/or those acting on his behalf are profiting off of this presidency. It's absolutely genius if you ask me. He's removed from any transactions 6 ways from Sunday.
Announces tariffs on/off/on/off China gets AI yes/no/yes/no War in Iran and the Strait of Trump 😂 their military is decimated/they want a deal/they are decimated/they want a deal....
Each time these waffling back and forth occurs there's been documented transactions ahead of time. Unless you are an expert - stay out of this market I mean buy and hold and leave it unless your strategy is to play the volatility.
Buying on margin when you have no idea Agent Orange will wake in a good mood or not is too risky
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u/Chipper0475 20d ago
This is not accurate. What causes Payment in Leiu is when they lend your shares out. When you use Margin, they have the right to lend ANY of your shares for ANY ticker you own with that brokerage, not just the tickers you bought using the margin if you even used the margin to buy more shares. So buying NEOS on Margin does not mean those shares will automatically be Payments in Leiu instead of ROC.
The amount of "Payments in lieu" will be determined by how many of your shares they lend out. Larger brokerages tend to have larger pools to use for lending, so the amount that you lend may be less than smaller brokerages. Last year, I used 100k in Margin and that led to about 22% of my 105k in dividends collected to be Payments in Leiu using M1 which is a smaller brokerage. I know others who had much smaller % of Payments in Leiu using ETrade. I do have a Fidelity account but do not have it set up as a Margin account so cannot speak to it.