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I'm invested in a broad range of index funds that pay dividends once a quarter. Whenever they pay dividends, IBKR deposits over half of those dividends into my account as "payments in lieu" instead of straight up, ordinary/qualified dividends.

I don't have a margin loan with them, or subscribe to their share lending program; so none of my shares should be getting lent out to short sellers for this to be happening.

I do have, however, naked short option positions in my account.

Why is this happening and how can I put a stop to it? Is it because of my naked short option positions?

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IBKR offers an explanation about why one might receive a Payment-In-Lieu dividend:

To summarize, if by the record date of a dividend certain shares have not been delivered to IB, the Firm will be paid an amount of cash that is equivalent to the dividend amount, but IB will not receive a qualified dividend payment directly from the issuer. In such cases, the Firm will receive PIL and will have no choice but to allocate such payment in lieu to customer accounts. The firm first allocates PIL to those accounts who hold the shares as collateral for a margin loan. If, after PIL is allocated to all shareholders whose accounts are not fully paid, any portion of PIL remains to be paid, it is allocated on a pro-rata basis to each remaining client account.

You best bet would be to call them for an accurate answer.

Holding naked short option positions in your account has no bearing on this.

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  • Actually, it looks like you don't need a negative balance for them to lend your shares. I got this automated response from their robot chat system thingy: "For IB-LLC customers, if (settled cash - settled short stock value - OCC naked options margin) < 0, then 140% of this deficit in stock value can be unsegregated and therefore subject to receiving a PIL". Key part here being "OCC naked options margin". I don't entirely understand what this means, but it looks like naked short option positions do play a role.
    – user19035
    Apr 2, 2022 at 19:58
  • As I understand it, hopefully correctly, margin account shares can be loaned out. Participating in their share lending program enables you to receive a portion of the short seller's borrow fee payment. You're not in it but you might be lending shares and that is why you're receiving PIL. As for their reply, it makes no sense to me either. I've been with them for 20+ years and at times I have had a wad of short options, short stock, long stock and loads of dividends. Never came across this problem. I don't see a direct connection with short options. Perhaps with the margin requirement? Apr 2, 2022 at 22:48
  • I don't understand either. In any case, I'm starting to move all of my assets to Fidelity. I don't know if I'll run into the same issue at Fidelity, but at least they offer a credit to make you whole for the extra taxes you're liable for because of the substitute payment: fidelity.com/tax-information/tax-topics/…
    – user19035
    Apr 5, 2022 at 21:06

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