Chartered Retirement Planning Counselor (CRPC) Practice Exam 2026 - Free CRPC Practice Questions and Study Guide

Substitute payments in lieu of dividends are typically treated as ordinary income for tax purposes. This is because these payments are made to investors who have lent out their shares, usually in a situation where the lender of the shares does not receive the actual dividends paid by the company. Instead, they receive substitute payments, which the IRS classifies as a form of compensation that is like income.

The rationale behind this treatment is that these payments represent a return on investment that is not tied to capital gains but rather to the income generated through dividend payments. Since they substitute for the normative return someone would have received as a dividend, it makes sense that they are taxed as ordinary income rather than being classified alongside capital gains or receiving preferential tax treatment.

Understanding this distinction is important for investors and tax advisors as they navigate the implications of receiving such payments and how they might affect overall tax liabilities.