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I am interested in lending my passive holdings for generating more income. Hopefully the risk is minimal. I see, for instance, two brokerages offering it. I am not asking any recommendation on brokerages, but about the pros and cons of this type of program. What should I be aware of when considering participation in such a program?

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    This site is not a good place for polling...
    – littleadv
    Commented Feb 4, 2022 at 4:30
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    @littleadv Agreed. I removed the unsuitable part.
    – Chris W. Rea
    Commented Feb 4, 2022 at 13:31

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The only con is how the dividends of the borrowed shares are treated come tax time. If the security pays any dividends while it is in the hands of a short seller, your broker pays you the same amount of the dividends as a payment-in-lieu to make you whole. The problem is that payments-in-lieu are taxed like regular income and do not receive the special tax rate that qualified dividends do.

Brokers make the claim that they will try to reclaim the lent shares before the security pays a dividend to avoid this situation, but my experience with Interactive Brokers and Fidelity has been that they don't actually try very hard. As a result, I paid more in extra taxes at the end of the year than I got in interest from their respective lending programs, so I stopped using the program immediately.

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  • thanks, I am planning to do this in ROTH and regular IRA
    – riya
    Commented Feb 6, 2022 at 4:55

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