- quote -

Margin can introduce so much complexity to interpreting
where you stand as to balances, etc. It can split positions,
and I'm puzzled by seeing an entire cash position disappear
and being listed as margin (does that mean it was lent to
someone else or that checks cannot be written on it?).

Anyway, is margin unsuitable for someone who simply wants
a safety valve to be able to sell short maybe once per
decade (or less) on an emergency basis? Don't need any of
the other capabilities of margin.

Alternatives are to use short-type mutual funds like
profunds or rydex, but then you run up against potential
short term trading fees when driven by emergency issues.
Or you can avoid fees by having a native mutual fund acct
but that means trapping assets in a normally unsuitable
environment for just that once in a great while need for
inverse tracking.

There were supposed to be etf's developed with inverse
tracking, which would be a perfect solution that would
allow discarding the margin account. But etf's aren't
proving popular enough for some of the unusual types
to be developed that were once projected.

Cynthia wrote:
- quote -

The problem occurs not just from having a margin account, but rather
from having dividend-paying securities lent out from that account. You
wouldn't necessarily have been aware of this in the past, it's something
your broker is allowed to do because you have a margin account.

When that happens, the person who borrowed the securities (presumably to
sell them short, as Rich described) pays you cash to replace the
dividend you would have received if the stock was still in your account.
That replacement payment is not a "qualified dividend," and is taxed as
ordinary income.

I've only begun to digest the new 1099 reporting but I believe these
payments are reported separately. So if all of this income is listed on
form 1099-DIV as "qualified" then this appears to be just a potential
problem with your account, that didn't come to pass in 2003.

- quote -

If you have a lot of dividend paying stocks (or your tax bracket is
high) that might not be a bad idea. Some people like to have margin as
an emergency source of cash, but if you aren't using it and don't plan
to, why bother?

- quote -

Yes I saw that in one firm's notice and thought it odd...seems that
would be taxable interest. And no doubt they don't guarantee that
payment in the future, it's probably motivated by a concern over
disclosure. They do make money from securities lending and if it makes
you, the securities owner, worse off...well then arguably the
disclosures should be explicit about the effect wrt taxes (hence the
recent amendments to account agreements).

If you really don't use margin, going to a cash account makes sense - it
would be one less thing to worry about.

-Tad

Gumbee1009[at]aol.com (Cynthia) writes:

- quote -

When you have a margin account you agree to let your broker lend
out ("hypothecate") your shares at any time. Why does your
broker want to lend out your shares? So that the person he lends
them to can short sell them.

Imagine that you have 100sh XYZ in your margin account. Your
broker lends them to person B who short sells them to person C.
Now XYZ pays a $2/sh dividend. Obviously person C gets the $200
dividend -- he actually holds the shares, after all. But you
sorta hold the shares as well (even though you didn't actually
own them on the dividend record date), so you need to get $200
too. What happens is that person B who sold them short gets
charged $200 by his broker, and that $200 is given to you. But
notice what happened -- you did not get a $200 dividend from XYZ.
You got a $200 payment from the short-seller. Therefore, you are
not entitled to qualified dividend status on that $200. Another
way to look at it is that the company paid out $200 of qualified
dividends on those shares, yet the "holders" of those shares (you
and person C) got $400 total. Obviously there's no way all $400
could be qualified dividends since the company only paid out $200
of qualified dividends.

As a side note, the same issue comes up for proxies for a
very similar reason.

- quote -

See above.

- quote -

It doesn't matter. Many (all?) margin account agreements let
the broker hypothecate the shares whether or not there's a
debit balance. But double-check your agreement and talk to
your broker. Often accounts with no debit balances are at
the last to be used as a source of lended shares.

- quote -

Another thing to do is just call the broker up and tell
them to journal the positions you care about to the
cash side of the account.

- quote -

Really? (boggle) I'd love to see the language on that pamphlet.
They say they are actually going to pay you cold hard cash if any
qualified dividends get turned to non-qual dividends due to stock
in your account being lent out? In any case, if they actually
make such a payment, it'll certainly be taxable income.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

If you want to point me to a reference on this rather than explain, I
would be totally OK.

My question is around margin accounts and qualified dividends. I know
that the new federal tax rates for qualified dividends are 15% rather
than ordinary rates. But I have also read something about
hyperthocated (something like that) dividends, which I think are those
that are received in a marginable account when one's shares are loaned
out (as a result of the margin agreement). Dividends received are
then NOT subject to the 15% tax rate.

Can someone give me direction about how one's qualified dividends will
be treated in 2004 when received in an account that has margin
priviledges? Assume that the stock paying dividends is owned long in
the account and no margin is actually being used. (Not sure if it even
matters what I do with margin).

I am thinking of changing my brokerage accounts to cash only, from
margin, in order to remove any hassle.

My broker sent me a pamphlet that explained that they would make me
whole tax wise as a result of the difference in tax rates. And I
thought, well, geez, will I have to pay tax on this? And then I
thought....well, geez, I don't use margin, maybe just remove the
hassle factor completely by going to a cash only account.

Any info that you have on qualified dividends in a margin account
would be helpful. Thanks in advance for your inputs.
Cynthia