Non-Taxable Distribution
What Is a Non-Taxable Distribution?
A non-taxable distribution is a payment to shareholders. It is like a dividend, however it addresses a share of a company's capital as opposed to its earnings. In opposition to what the name could suggest, it's not exactly non-taxable. It's just not taxed until the investor sells the stock of the company that issued the distribution. Non-taxable distributions reduce the basis of the stock.
Stock received from a corporate spinoff might be moved to stockholders as a non-taxable distribution. Dividends paid to cash-esteem life insurance policyholders are viewed as non-taxable distributions.
Non-taxable distributions likewise might be alluded to as non-dividend distributions or return of capital distributions.
Grasping Non-Taxable Distributions
A non-taxable distribution to shareholders isn't paid from the earnings or profits of a company or a mutual fund. It is a return of capital, implying that investors are getting back a portion of the money they invested in the company.
Instances of non-taxable distributions incorporate stock dividends, stock splits, stock rights, and distributions received from a partial or complete liquidation of a corporation.
The distribution is a non-taxable event when it is dispensed, however it will be taxable when the stock is sold. Shareholders who receive non-taxable distributions must reduce the cost basis of their stock in like manner. At the point when the shareholder sells the stock, the capital gain or loss that results will be calculated from the adjusted basis.
For instance, say an investor purchases 100 shares of a stock for $800. During the tax year, the investor receives a non-taxable distribution of $90 from the company. The cost basis will be adjusted to $710 (the price paid for the shares minus the distribution). The next year, the investor sells the shares for $1,000. For tax purposes, the investor's capital gain is $290 (the $200 profit plus the $90 distribution).
The amount of a non-dividend distribution is normally more modest than the investor's basis in the shares. In the rare case in which the distribution is more than the basis, the shareholder must reduce their cost basis to zero and report the excess amount of the distribution as a capital gain on IRS Form Schedule D.
For instance, expect the investor in the model above receives a total of $890 in non-taxable dividends. The first $800 of the distribution will reduce the cost basis to zero. The excess $90 must be reported as a short-or long-term capital gain, contingent upon whether the shares were held for a year or less.
Non-taxable distributions are generally reported in Box 3 of Form 1099-DIV. Return of capital appears under the "Non-Dividend Distributions" column on the form. The investor might receive this form from the company that paid the dividend. On the off chance that not, the distribution might be reported as a ordinary dividend. IRS Publication 550 gives itemized information to investors about reporting requirements for investment income, including non-dividend distribution income.
Features
- A non-taxable distribution might be a stock dividend, a stock split, or a distribution from a corporate liquidation.
- A non-taxable distribution is just taxable when you sell the stock of the corporation that issued the distribution.
- The non-taxable distribution is reported to the IRS as a reduction in the cost basis of the stock.
