If you receive any "return of capital" payments on stocks you own, you must reduce your cost basis in the investment. If any portion of the payment exceeds your remaining cost basis, you must recognize a capital gain for the remainder. See ourReturn of Capitalpagefor a detailed explanation and example.
These are called "nondividend distributions" on your Form 1099-DIV.
You are required to apply the return of capital to each tax lot separately. You cannot choose to apply it only to your high cost basis tax lots. You may end up with some tax lots where the cumulative return of capital payments exceed your original cost basis per share. In that case, you are required to recognize any excess return of capital payment for that tax lot as a capital gain distribution.
Return of Capital Calculator
If you have multiple tax lots, apply the return of capital payment prorata according to the number of shares in each tax lot. Corporations pay dividends and return of capital payments equally to each share held on the record date.
Capital gain allocations are the opposite of return of capital adjustments. These occur when the REIT or registered investment corporation realizes capital gains but keeps the proceeds in the company even though the capital gain income is taxed to the shareholder. The capital gain allocation amount and related income taxes paid on behalf of the taxpayer are reported on IRS Form 2439, "Notice to Shareholder of Undistributed Long-Term Capital Gains." The net amount (allocated capital gain less taxes paid) increasesyour cost basis, instead of decreasing your cost basis as in the case of return of capital. Capital Southwest Corp is an example of a stock that has made this type of adjustment to cost basis per share.
Information provided is intended solely for cash-basis U.S. citizen individual taxpayers and is believed to be accurate for most cases but is not guaranteed. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please email our webmaster @ costbasis.com with your comments. If this website has been helpful to you, please consider making a donation to support our efforts.