This is considered a "nontaxable distribution" and/or "return of capital/principal" depending on the facts and circumstances. Read further.
The cost basis does apply here. A return of capital is a return of some or all of your investment in the stock of the company and reduces the basis of your stock asset but is not a taxable event until your basis in the stock goes to zero, at which point it becomes a capital gain.
- For example, if you originally paid $10/share for 100 shares , the cost basis of all the shares is $1,000. If you get a $5/share principal payment (return of capital), instead of having a cost basis for the 100 shares of $1,000, you now have a cost basis of $500 ($1,000 original cost basis minus $500, which is 100 shares times the $5 per share capital distribution).
- In TurboTax, you should enter the cost basis to be equal to the proceeds when you have a return of capital.
- A distribution generally qualifies as a return of capital if the corporation making the distribution does not have any accumulated or current year earnings and profits. Once the basis of your stock has been reduced to zero, any further non-dividend distribution is capital gain. At this time you would enter zero for the cost basis.
