A non-dividend 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 non-dividend distribution should be issued to the taxpayer. On Form 1099-DIV, a non-dividend 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 non-dividend 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 non-dividend 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.