Actually, you won't report your non-divided distribution to the IRS,
and you won't enter it on your tax return. Please allow
me to explain.
A non-dividend distribution is just another way of
saying "return of capital." It is meant for your information only, and
that of your brokerage or financial firm. A non-dividend distribution,
you see, is a return of some portion of your original investment; and as
such you would need only to reduce the cost basis of your stock, bond,
mutual fund, other security, etc. This adjustment does matter in future
tax periods, because it is the difference between basis and net
proceeds on which capital gains taxes are applied. Perhaps a numerical
example will be illustrative.
Let's say you buy a single share of
stock at $100. That's your original cost basis. Then, one day your
company issues you a non-dividend distribution of $20. Your stock's
adjusted basis is now $100 - $20 = $80. When you later sell your share
of stock to an unrelated third-party for $110, your taxable capital gain
is now $30 (the difference between $110 and $80), and not $10 (the
difference between $110 and $100). Does that make sense?
The IRS instructions for Form 1099-DIV Box 3 will tell you much the same thing:
https://www.irs.gov/pub/irs-access/f1099div_accessible.pdf
Another way of looking at it is you have simply been given back
part of your original investment. If
you were to receive a 1099-DIV statement, with an amount printed in Box 3
(non-dividend distribution), then you could certainly type that number
into the
TurboTax data entry screen for the 1099-DIV tax form . . . but it won't
actually do anything. Quite honestly, the Box 3 entry field is put
there only to make our customers feel more comfortable that TurboTax is
accurately capturing their tax information. That is the whole purpose.
However,
the important thing to note about a non-dividend distribution, and
something that does require action, is that of the taxpayer's own
recordkeeping. If you have a brokerage firm holding this asset, it is
likely that they will adjust the cost basis for you in their records
(and thus in yours too). But if you hold this asset on your own,
outside of any financial institution, then you'll need to adjust your
own basis and own records.
What you will not have to do, however,
is to either enter or disclose this item anywhere on your tax return,
either federal or state (if applicable).
Thank you for asking this important question.
