I would advise not to report a liquidating distribution that is still a part of your cost basis recovery. It would be in and out of your tax return and it is a manual adjustment so to speak. You can keep your records and respond if the IRS every has a question.
Records to keep: (Required as routine for any dividends and investment purchases)
- The amounts you paid for this investment from the beginning until all liquidation payments have been received. This would include any reinvested dividends, if applicable.
- Total amount of shares purchased at each purchase date
- Total of any prior year (before liquidation) return of capital dividends / nontaxable distributions (shown on Form 1099-DIV)
- Forms 1099-DIV or all years as proof of any return of capital / nontaxable distributions
These records may be needed until three years after the final liquidation is paid out. If and when you receive liquidating distributions that exceed your cost basis only then do you have a reportable tax sale transaction.
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