I have an amount in Box 3 non dividend distributions. Is that reportable/requiring an adjustment somewhere?

[GeoffreyG]

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.

[Aquarius5]

Do we just trust our broker to eventually adjust the cost basis accordingly as you described once they report the 1099 to the IRS?

I received some non-dividend distributions but did not seem to notice my broker (Ally Invest) adjust the cost basis of my shares at all, at least based on their web-based view of current tax lots.

[SamS1]

You can contact the broker to discuss their policy on non-dividend distributions.  You may need to track them yourself.  They should be able to manually adjust down the basis for the non-dividend distributions received. They will not be taxed until cost or other basis is completely recovered. Reduce cost or other basis by these distributions. If the taxpayer gets back all cost or other basis, report the excess distributions as capital gains.   

The 1099 Series are informational reporting forms submitted to the IRS by third parties. The IRS then matches the form information to your tax return to insure all income is reported and taxed. If you do not include a 1099 received from a third party on your tax return, you will receive a notice from the IRS asking why. This is the CP2000 matching notice. If you receive this notice from the IRS, make sure and respond by the date indicate on the notice.

[cocoanuts]

Wow, glad I researched and asked Turbotax.  I have a non-dividend distribution for 2024 on my 1099-DIV.  I entered it into my tax SW, but it was flagged during the review/checks. That is the only reason I researched and learned about reducing my cost basis on that stock because it WAS sold last year.  I ran this question by my Morgan Stanley broker, he researched, too, and agreed that I should reduce my cost basis. Never did he say to not report it at all and that it was simply my own money being returned to me (that probably got reported as income the previous year).  And apparently, he has no idea if Morgan Stanley ready adjusted my cost basis for me and doing so again would be dumb. (I did not know to ask that question.) It is only $6. But what if it had been $600? I thought that if the amount was on my 1099, I needed to report it because the IRS knows about it. The stock sold is a "non-covered security", so the cost basis was not reported to the IRS by MS. Should I just delete the $6 entry? 

[DawnC]

No, don't delete it.  A non-dividend (box 3 of 1099-DIV) distribution is nontaxable because it is a return of capital. The treatment of the distribution is the same if it is for $6 or $600.  

The amount of a non-dividend distribution is usually smaller your basis.  In the rare case in which the distribution is more than the basis, the shareholder must reduce their cost basis to zero and report the excess amount of the distribution as a capital gain on IRS Form Schedule D.

Once the adjusted cost basis of your stock has been reduced to zero, any further non-dividend distribution is a taxable capital gain that you report on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D, Capital Gains and Losses.  @cocoanuts 

Keep track of your cost basis.  If the basis is already zero and you need to report a capital gain, search for investment sales, use the jump to link and use the 1099-B entry to report a capital gain.   Where do I enter a capital gain?

[cocoanuts]

Are we certain it is nontaxable? The stock was sold in 2024. (Doesn't that mean that I will never get another distribution like this from this particular stock again?)

Regarding deleting the $6 non-dividend distribution, I meant delete the entry from the tax software (so a warning will not pop up during final review before eFile). But then I read elsewhere that when you SELL, you do have to report that non-dividend distribution AND reduce the cost basis for that stock so the loss or gain is correct. My issue is that it appears that the cost basis was not reduced for me by the brokerage. So my rep said I could do it. The more I research, the more confusing it becomes. 😕

Here is the OP note under this non-dividend distribution. Do you understand it?? Because I do not.

"This dividend was declared in 2023 and paid to you in January 2024. If the fund company elected to partially defer this payment for tax reporting purposes, then a portion of this payment was reported on your 2023 1099-DIV and this amount represents the remaining portion of that payment which is taxable in 2024. If the 2023 declared dividend was fully deferred by the fund company, this amount represents the entire payment that is reportable in 2024." (I reviewed the 2023 1099-DIV. There WAS a $2 non-dividend distribution.) THANK YOU!!!

[IsabellaG]

From this Morgan-Stanley  2024 tax guide: Reallocation of distributions: Return of capital redesignation
"A portion of the income dividends paid by certain Morgan Stanley Funds may have been redesignated as nontaxable return of capital. Your Form 1099-DIV for these funds reports the proper amount of “non-dividend distributions” for income tax purposes. If a return of capital was reported to you, an adjustment to the basis of your
shares will be necessary. Please consult your tax advisor for further information."

I interpret that to mean that Morgan Stanley does not reduce your cost basis for these distributions, and it's up to you to adjust your basis. Since you sold the stock this year, you would adjust your original cost basis by the distributions made over the time you owned the stock. I don't see how the non-dividend distribution, if you reported it correctly in box 3 of your 1099-DIV, would generate any kind of error, but if it does, you could remove that entry as long as you correctly report your basis.

[cocoanuts]

Thanks so much! That is what I did. I did the math and determined that Morgan Stanley had not reduced the cost basis on my behalf so I did that manually within the tax software so that my loss amount is correct. Also, I went back to the dividend entry section and removed the non-dividend distribution from Box 3 as I learned it was informational (from brokerage to me) and is not taxable.  After I made those 2 changes, I ran another check and the WARNING about a possible incorrect entry went away. I am now sufficiently confident that this has been handled correctly and will be able to file both federal and state returns. Thanks again for providing such clarity. 😃😁🥰