It depends on the type of distribution. If
you receive a tax free distribution (usually, a “return of capital”), you do
reduce your cost basis for the amount of the distribution. You show nothing
about the distribution, on your tax return. You only adjust the cost basis, on your
own records, for when the stock is sold in the future.
Ordinary stock dividends are taxed as income
and do not affect your basis.
For distributions of additional shares, your
original cost basis remains fixed and is just spread over more shares. For
example; if you originally bought 100 shares for $1000, your cost basis was $10/share.
If you receive a distribution of 10
additional shares, your cost basis in
the 110 shares is still $1000, but is now $9.09/share (1000 / 110)
