Capital gain allocations are non-cash dividends taxed to shareholders for capital gains realized by the corporation but retained by the corporation for capital enhancement.
This corporate action is an addition to the cost basis of your investment in the stock. It is not a common or frequent corporate action. The only company we have come across that does this regularly is Capital Southwest Corp.
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The company ordinarily also pays part of the dividend in cash for the estimated amount of the income tax owed on the retained capital gain that is being taxed to the shareholder. The cash portion is then sent to the tax authorities on behalf of the taxpayer. The adjustment to your cost basis is the net dividend excluding the cash portion remitted for taxes. Your new cost basis can be calculated using our return of capital calculator, but enter the ROC amount as a negative so that it will increase your cost basis rather than decrease it.
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