Please allow me to confirm the terms used in the question so that we are sure we are talking about the same things. Dividends are clearly unearned income--no issue there. A gain (or loss) is "realized" when the security is sold. I refer to this gain/loss as a capital gain or loss. And a capital gain is unearned income. With regard to "capital distributions", I am interpreting that to mean a distribution that is not form the corporation's earnings or profits. That distribution is normally reported as a "non-dividend distribution" on Line 3 of a 1099-DIV. That distribution is not taxable, but it reduces the basis of the security. The reduction in the basis could increase the realized income when the security is later sold. But a non-dividend distribution does not affect income until the security is sold. Therefore, because income does not exist for a non-dividend distribution, it cannot contribute to unearned income. I hope that makes sense.
