How do I report capital gains on non-dividend distribution? The 1099 given me will not be correct and I have no other forms.

[confusedinwashin]

No other info required.

[GeoffreyG · Accepted solution]

Actually, you won't report your non-divided distribution to the IRS, and you won't enter it on your tax return.  You won't have any capital gains tax to pay on the non-dividend distribution either.  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.

[aj485]

This answer didn't actually answer the question that was asked.  I would agree that for a stock with an original $100 basis, if an $80 non-dividend distribution is received, then the stock basis gets adjusted down to $20.  But what about if an additional $30 non-dividend distribution is received?  Then your basis is driven down to $0, plus you have a $10 capital gain.  How do you report that capital gain in TurboTax?

[GeoffreyG]

Hello aj485:

With respect, the (well-taken) point your raise in your comment is a separate question, although related, to what the original poster asked.  But you do bring up an excellent issue, and it is certainly worthy of some additional discussion.

The situation you describe actually has a name, and is called a "nondividend distribution in excess of basis."  It rarely, if ever, happens with a publicly-traded C-corporation, but can certainly occur in a privately-held S-corporation, or sometimes even with Publicly-traded Master Limited Partnerships (MLPs), especially where the owner has held his or her shares / units a long time, and may have a low basis at the time of a non-dividend distribution (a.k.a. return of capital).

Let's take your numbers to illustrate an actual example.  You are indeed correct that when a shareholder experiences a distribution in excess of their basis, they have to recognize (and report) a capital gain on their personal tax return in that same year, sufficient to "restore" their basis back to zero.

Thus, in 2016, if a shareholder owns a stock with a basis of $20, and receives a nondividend distribution of $30, this would otherwise result in a basis of -$10.  However, this cannot be allowed to exist, according to the tax law.  Thus, the shareholder has to recognize (that year) a capital gain of $10, which will "restore" their basis back to $0 (the lowest number allowable).  The nature of the capital gain, whether that is long-term or short-term, will depend on the holding period (longer than one year or shorter than one year) of the underlying stock.

As to where (or how) you would report this in TurboTax, the answer to that is easy.  You would just enter it in the stock/investments sales section of the program, the same as you would with any other capital asset sale, which gets reported on a Form 1040, Schedule D (capital gains or losses) . . . after it first "flows through" Form 8949.

Furthermore, you would want to mechanically enter this item as a discrete stock "sale," with a net proceeds (sale price) of $10, and a cost basis of $0 (or $0.01, if you need to enter a positive basis number of some kind to avoid a program error).  It would furthermore be a "non-covered" security; and the long-term / short-term nature of the "sale" would, again, depend on your holding period.

Hopefully this answer is understandable, and thanks again for asking this good question.

[ckader]

With no sale of stock involved, just capital gains because of basis of zero,  does this just get entered as a sale?  What about the sale date? Since there isn’t one, found your answer a little confusing.  Second entry? As discrete sale? Can’t find any help with entering just capital gain without a sale of stock.

[TomYoung]

@ckader 

"With no sale of stock involved, just capital gains because of basis of zero, does this just get entered as a sale?"

Yes.  The distribution is your "proceeds" from the sale and the basis is whatever the basis was just before the distribution was received.  You'd use the date of the distribution as the sales date.  You'd tell TurboTax that no 1099-B was received and the sale would end up as a Category C or F sale on Form 8949 depending on your holding period.

[jdhenrichs]

@TomYoung 

Why would I enter the "date of distribution as the sales date" when the IRS examples for this type of transaction show blanks for both the acquisition date and sale date on Form 8949?

[JamesG1]

In the IRS example, how are you able to determine long-term versus short-term without disclosing dates of sale or purchase?