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The broker is saying they are payments in lieu, but the account is not a margin account nor did I sign any lending agreement.

Almost every brokerage account is a margin account. That is the standard account type because it offers the broker another way to make money (while keeping your fees low). Brokers often borrow shares from their clients to lend to others. They collect interest on the loan, but usually don't pass that interest on to the client (you) who provided the shares. You need to look at the language of the customer agreement you signed when you opened the account.

Some brokers used to maintain two separate accounts for each client: a cash account and a margin account. You could request that shares be held in the cash account, which meant that they couldn't be lent out. You also couldn't borrow against the cash account. I don't know if that's current procedure.

Getting back to your situation, if your broker lent your shares to a third party and a dividend was paid during the loan period, it is properly reported to you as a payment in lieu of a dividend on Form 1099-MISC. The income is reported on line 21 of Form 1040 and is not eligible for capital gains tax rate treatment.

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