Definition
Section 871(m) of the US Internal Revenue Code imposes US withholding tax on dividend-equivalent payments made to non-US persons on certain equity-linked instruments that replicate US equity economic exposure. The rule is relevant to derivatives and tokenized instruments structured to reference US equities, and it shapes the tax compliance surface institutional firms need when offering products linked to US underlyings. In digital asset markets, 871(m) considerations apply as tokenized securities and synthetic exposure products proliferate.
Example
A non-US hedge fund enters a total return swap referencing a US equity through a prime broker. Under Section 871(m), the prime broker may be required to withhold US tax on dividend-equivalent payments flowing through the swap, and must report accordingly.
How Liquid Mercury Handles This
Mercury RWA integrates with tax-compliance infrastructure for tokenized securities and synthetic exposure products where Section 871(m) applies, with audit trails that support withholding and reporting obligations.