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Category: Tax Questions

Nondividend Distribution Statements

A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund.  A Form 1099-DIV or other statement showing the nondividend distribution should be issued to the taxpayer.  On Form 1099-DIV, a nondividend distribution will be shown in box 3 and generally is not taxable.  If you do not receive such a statement, you report the distribution as an ordinary dividend.

Basis adjustment.  A nondividend distribution reduces the basis of your stock.  It is not taxed until your basis in the stock is fully recovered.  This nontaxable portion is also called a return of capital.  It is a return of your investment in the stock of the company.  If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first.

When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain on Schedule D.  Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock.

Additional link:
Instructions for Form 1099-DIV, Dividends and Distributions

Last Updated: 8/5/2015

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