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I own some preferred shares in a Fidelity account. Fidelity obviously lends my shares for securities lending, because I only get about 25% of my payments as dividends. The rest comes on the 1099-MISC as "payments in lieu of dividends". When this happened 2 years ago, I got some tax gross-up payment -- don't know how it got calculated, how I get taxed on it, etc., but it just appeared one day. I expect the same thing will happen this year.

My immediate question is: Is it appropriate to report it as divs on my tax form. Right now, it is taxed at full income rates AND it does not get used to offset by margin interest. I would like to optimize that situation.

Is there anyone who has experience with this who could advise me?

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