Nondividend Distributions and Other Distributions
What is a nondividend distribution?
A nondividend distribution is a distribution that is not paid out of the earning and profits of a corporation. A nondividend distribution reduces the basis of your stock.
How are nondividend distributions taxes?
A nondividend distribution is not taxed until your basis in the stock is fully recovered. The taxable portion of the nondividend distribution is called a return of capital. A nontaxable return of capital is reported in box 3 of the form 1099 DIV or on a substitute form 1099 DIV statement from the corporation.
How to report nondividend distributions?
Once your basis has been reduced to zero, you report any additional return of capital as a capital gain.
Example of how nondividend distributions are taxes and reported to the IRS
If you purchase stock in 1995 for $4,000 and received a return of capital of $500 on the stock in 1998, you must reduce your basis in the stock by $500. So, your new basis of the stock would be $3,500. In 2007, you received another return of capital of $4,500 which is more than your basis. So, the basis is reduced to zero and the remaining $1,000 return of capital is considered a long term capital gain and is taxable in 2007 tax year.
Other types of nontaxable distributions include:
Are Alaska Permanent Fund Dividends actually dividends?
No. Alaska Permanent Fund Dividends are not dividends and are reported on line 21 of the tax form 1040 as other income, not dividend income.