A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. Typically this is a return of capital or the investment that was made by the owner of the corporation or mutual fund.
A Form 1099-DIV or other statement showing the nondividend distribution should be issued to the taxpayer. On the Form 1099-DIV, a nondividend distribution will be shown in Box 3 and generally is not taxable.
Basis adjustment. A nondividend distribution reduces the basis of your stock. As a reduction in basis, it is not taxed until your basis (or investment) 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 all of the investment that was made in the entity has been recovered by the owner, the basis of the taxpayer’s stock is reduced to zero. Once this occurs any additional nondividend distribution receive by the taxpayer is considered a capital gain and is reported on Schedule D. Whether the taxpayer report it as a long-term or short-term capital gain depends on how long the stock has been owned by the taxpayer.
NOTE: This is a guide on entering information into the Keystone Tax Solutions Pro program. This is not intended as tax advise.
Additional Resources: