What is the 871(m) rule?
Section 871(m) of the U.S. Internal Revenue Code (IRC) is designed to prevent non-U.S. persons from avoiding withholding tax on U.S. equities by using derivatives or structured products. Withholding tax applies when a cash dividend is paid on a U.S. stock. The standard tax rate is 30%, but this can be reduced to 15% through a valid IRS Form W-8BEN.
The 871(m) rule extends U.S. withholding tax to dividend-equivalent payments from financial instruments whose underlying is a U.S. equity.
This includes products such as warrants, discount certificates, structured notes, or futures.
Trading in warrants and certificates on US equities is currently restricted.
Trading Restriction
Under the 871(m) rule, issuers of relevant products are required to monitor and record the tax position of the holders and ensure accurate tax withholding. In practice, this is not feasible for many instruments. To prevent circumvention of U.S. withholding tax via derivative products, trading in these instruments is currently restricted through LYNX.
This restriction applies even when:
- The U.S. equity does not currently pay dividends, or
- Only one component of the underlying basket is a U.S. stock
Impacted Instruments
- Warrants
- Convertible Bonds
- Certificates (e.g. bonus, discount, turbo)
- Structured Notes
- Indices (containing U.S. equities)
- Securities Lending
- Exchange-listed Derivatives (options and futures)
These instruments are affected if the following conditions are met:
- The underlying includes one or more U.S. equities, regardless of the issuer’s country of residence
- These U.S. equities pay a dividend during the life cycle of the derivative
- The derivative has a delta calculated by the issuer:
- Equal to 1.0, or
- Greater than or equal to 0.8 (for instruments issued on or after 1 January 2019)The delta measures the sensitivity of the derivative to the price movement of the underlying equity.
The delta measures the sensitivity of the derivative to the price movement of the underlying equity.
Order Rejection
If you attempt to submit an order for a product affected by 871(m), your order will be rejected.
Your trading platform (e.g. LYNX+, TWS, or Mobile App) will display an error message indicating that the instrument is subject to 871(m) restrictions.
| The information provided above is intended as a simplified explanation of Section 871(m). It does not cover all criteria under IRS rules. Therefore, LYNX cannot guarantee that a product is tradable based on the conditions listed here.Always consult the relevant documentation or seek professional tax advice for certainty. |
FAQ
Can I trade Warrants and Certificates on U.S. equities via LYNX?
No. Trading in warrants and certificates on U.S. equities is currently restricted under the 871(m) rule.
What is the purpose of 871 (m) rule?
871(m) rule has been designed in in the U.S. Internal Revenue Code (IRC) to prevent non-U.S. citizens from avoiding withholding tax on U.S. equities via derivatives.
What are the products that are impacted by rule 871 (m) ?
Warrants, convertible bonds, certificates, structured notes, indices, securities lending and exchange-listed derivatives are covered if:
- The underlying securities are US equities – regardless of the issuer’s country of residence
- These US equities pay a dividend during the life cycle of the derivatives
- The derivatives have a delta calculated by the issuers that is equal to 1 (derivatives issued on or after January 1, 2019 with a delta greater than or equal to 0.8 are also covered).