How do you report a non dividend distribution where you have a loss in the underlying stock? How do you report a non dividend distribution where you have a gain in the underlying stock? Thanks for your help.

When you receive this type of distribution, you're considered to be getting back some of the money you invested in the company. That's why these payments are sometimes called return of capital distributions. Return of capital distributions don't come from any other type of earnings. When you receive a return of capital, you're getting some of your investment back, so your basis in the shares goes down. Since 1998 the IRS does not ask you to report these distributions at all. (Before that, you had to report them as part of your dividends and then subtract them so they would be nontaxable.) So the only time you have to report anything from a nondividend distribution is when the amount exceeds your basis in the shares. If an return of capital distribution exceeds a shareholder's cost basis of the underlying stock, then any additional amount is treated as a capital gain. For example: A shareholder buys 1 share of Fund A for $10. Fund A pays a $1 per share return of capital distribution. The shareholder's cost basis in Fund A after the return of capital distribution is $9 per share ($10 initial investment less $1 return of capital distribution).So, non-dividend distributions are not paid from a corporation’s earnings and are not taxable income. These should be reported in box 3 of Form 1099-DIV. These distributions are actually a return of capital and reduce your basis in the stock, until all your investment is recovered. If you buy stock in different lots at different times, you should reduce the basis of the earliest purchases first. Once all your basis has been recovered, any additional non-dividend distributions would be reported as capital gains, either short-term or long-term, depending on how long you held the stock

Thanks for the quick reply.
One more question, this year one has the option of filling in individual transactions on a 8949 form or attaching a statement to the summary on the form. Can one send the brokerage statement when filing the summary on the
8949 form, if it has all the pertinent information? Or do you need the redo the columns for the transactions on a separate attached statement?
Thanks in advance for your help.

“ this year one has the option of filling in individual transactions on a 8949 form or attaching a statement to the summary on the form. Can one send the brokerage statement when filing the summary on the 8949 form, if it has all the pertinent information? “================>According to the Instructions for SchD and Form 8949, instead of reporting each transaction on a separate line of Form 8949, you can attach a statement, such as a statement from your broker, that contains the same information in the same format. Then you would report the totals from each attachment on Form 8949, according to the box you check.If you e-file your return and want to use an attachment instead of entering each individual transaction, you must mail the IRS a Form 8453and attach Form 8949 or a similar statement with the same information Brokerage firms send out a Form 1099-B to report the sale of an investment product. Previously, the 1099-B reported information about the sale of the investment (such as the date of sale and the sale proceeds). Taxpayers then needed to supply the purchase date and purchase price when reporting the transaction on their Sch D. Many brokers already provided gain/loss reports as supplemental information with their annual reports. Starting in 2011, cost basis information will be included directly on the 1099-B if the broker is required to supply that information. Whether a broker is required to provide cost basis information depends on whether the investment is a "covered security." Brokers are required to provide cost basis for stocks acquired during 2011 (or later), for mutual funds and stocks in a dividend reinvestment plan acquired during 2012 (or later), and all other investment products acquired during 2013 (or later). Sch D now functions as a summary of all capital gains transactions. Individual investment sales are to be detailed on the new Form 8949.

Thanks once again for all your help.................

Hi Wnhough, how about this? When stocks crash after management said things were OK, the companies get class actions lawsuits against them. If there's any money left, there will usually be a settlement years later in which the class consisting of some losing investors will get some scraps back from their losses. I got a ~$1200 check in 2012 from such a settlement. My loss on the trade was ~$7000 in 2007. The check came with a 1099-DIV, and is listed as a "nondividend distribution". A statement from the law firm says, "...the tax treatment of this distribution varies based on the recipient's tax status and each individual's circumstances..", so it doesn't give info on how to report it. The typical instructions for treatment of a nondividend distribution seem to assume that one still holds the stock, and one can ignore the return of capital for tax reporting until one's cost basis has been surpassed. In my instance, I bought and sold the stock in 2007, and reported the ~$7000 loss on this trade on my 2007 IRS return. I also had a big loss overall in entire income that year, and this ~$1200 added to it would have made only a tiny dent in my overall loss for the year. I'm thinking that the treatment of this distribution may be different from the standard scenario since the stock position it was based on was closed and accounted for 5 years ago. I sure hope that the IRS doesn't expect a 2007 1040X over this. What say you? Thanks!

“When stocks crash after management said things were OK, the companies get class actions lawsuits against them. If there's any money left, there will usually be a settlement years later in which the class consisting of some losing investors will get some scraps back from their losses. I got a ~$1200 check in 2012 from such a settlement. My loss on the trade was ~$7000 in 2007. The check came with a 1099-DIV, and is listed as a "nondividend distribution"========The consequences on the amount you receive from the settlement depends on whether you still own the stock. If you still have the stock, your question should be: is the amount that you receive ordinary income, capital gain or something else? If you don't own the stock anymore, then the amount you received is considered short-term capital gain, ordinary gain. If you still own the stock, the answer is not so clear. To recognize capital gain on the settlement, there has to be a sale or exchange of an asset, such as the stock. Since the settlement doesn't result in a sale or exchange, it might be that the recovery of $1.2K is ordinary income. This could be incentive to get rid of the stock before the settlement. Alternatively, since the settlement is a recovery presumably for a decline in value of the stock, it is my opinion that if you still own the stock that the recovery would go to reduce your basis in the stock. I haven't been able to find substantial support for this treatment in this particular area of the law. As long as you fully deducted your loss of $7K against other income on your returns againt other income ,then, you need to report the recovery on your return as ordinary income.


“ A statement from the law firm says, "...the tax treatment of this distribution varies based on the recipient's tax status and each individual's circumstances..", so it doesn't give info on how to report it. The typical instructions for treatment of a nondividend distribution seem to assume that one still holds the stock, and one can ignore the return of capital for tax reporting until one's cost basis has been surpassed.”===============Agreed as said abvoe; A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation. You should receive a Form 1099-DIV or other statement from the corporation showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you do not receive such a statement, you report the distribution as an ordinary dividend. A nondividend distribution reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered as you said. This nontaxable portion is also called a return of capital. It is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution,you need to reduce the basis of your earliest purchases first. When the basis of your stock has been reduced to zero, then, you need to report any additional nondividend distribution that you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. For example, you bought stock in 1996 for $100. In 1999, you received a nondividend distribution of $80. You did not include this amount in your income, but you reduced the basis of your stock to $20. You received a nondividend distribution of $30 in 2008. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2008. You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years.

“ In my instance, I bought and sold the stock in 2007, and reported the ~$7000 loss on this trade on my 2007 IRS return. I also had a big loss overall in entire income that year, and this ~$1200 added to it would have made only a tiny dent in my overall loss for the year. I'm thinking that the treatment of this distribution may be different from the standard scenario since the stock position it was based on was closed and accounted for 5 years ago. I sure hope that the IRS doesn't expect a 2007 1040X over this. What say you?”==========Then , as you sold the stock in 2007, and reported the ~$7000 loss on this trade on my 2007 IRS return, you need to report the recovery of $1.2K , ordinary income, on your 2007 return. Your deductible short-term capital losses are those assets you own for one year or less. For example,if you purchase the share of stock on Sept. 20, 2010 and sell it on June 20, 2011, then you must treat it as a short-term loss. The significance is that these losses can offset any of your other short-term gains first, with the excess able to reduce your taxable long-term gains. If you have no other long-term gains, then you can deduct up to $3K of the loss per year against your other income until the loss is fully deducted. When you hold the stock for more than one year, then your $5 loss is a long-term capital loss. You first net your long-term capital losses with any long-term capital gains. If these losses exceed the gains, then you can use the excess loss to reduce your taxable short-term capital gains. If it exceeds your short-term capital gains, the losses are also deductible up to $3K per year(against other income ) with the remaining amounts deductible in future years subject to the same annual limitations.

Thanks for your prompt response. I regret that I've been slow to respond; I've had some more pressing issues.

I must say that I find your response confusing and full of extraneous stuff related to whether I still own the stock. Again, I bought and sold the stock in 2007, for which I realized ~$7200 loss as part of my overall ~$75K capital loss for the year, and overall negative income on my Form 1040. I still don't know whether this settlement check should be reported as ordinary income, a capital gain (What's the basis? When acquired? When sold?), or other. Regarding your assertion to report it on my 2007 return, I feel that you may have been led down that path by my mention of a possible need to report this on a 1040X for 2007. I'm no tax professional, but on reflection, common sense (I know, not necessarily something to apply to IRS rules) tells me that income received in 2012 is not reported in another year, despite the income being related to an event in 2007. The fact is that my position in the stock was closed and accounted for in 2007, and I don't believe that this check received 5 years later can be used to revise that capital loss. Moreover, a revision of this capital loss with a 2007 1040X would change the capital loss carried forward and require a revision of my 2008 tax return. Though I'd obviously like to find some way not to have to pay tax on this settlement check, I'm guessing that I'll have to report it as ordinary income. I will try to get an answer from the IRS (haven't had good experience in getting answers from the IRS before) and the local AARP tax aide. I do my own tax returns, and certainly don't want to pay an accountant just for this one question over a relatively small amount. If you can figure out a definitive answer or have additional thoughts, I'd appreciate it. I plan to post what the IRS and AARP tell me, and what I end up doing.

“Again, I bought and sold the stock in 2007, for which I realized ~$7200 loss as part of my overall ~$75K capital loss for the year, and overall negative income on my Form 1040. I still don't know whether this settlement check should be reported as ordinary income, a capital gain (What's the basis When acquired? When sold?), or other.”======= As said previously, the consequences on the amount you receive from the settlement depends on whether you still own the stock. As you said, as you don't own the stock anymore, then the amount you received is considered ordinary gain/income. As a taxpayer, you of course would want to claim it as long term capital gain but the IRS would want it characterized as ordinary income the settlement amount paid to you DOES NOT come from the actual sale or exchange of the stocks, it is paid to you for damages you suffered and generally, damages are ordinary income.So, you need to report the ordinary income from the sale of the stock and report it on 1040 line 21. You already got a Form 1099 from the company .I guess you can indefinitely carry forward your $75K capital loss. You can carry unused capital losses forward for as long as you live. Your capital losses will offset capital gains and up to $3K per year (or $1.5K for married filing separately status) if you have other taxable income.


“Regarding your assertion to report it on my 2007 return, I feel that you may have been led down that path by my mention of a possible need to report this on a 1040X for 2007. I'm no tax professional, but on reflection, common sense (I know, not necessarily something to apply to IRS rules) tells me that income received in 2012 is not reported in another year, despite the income being related to an event in 2007. The fact is that my position in the stock was closed and accounted for in 2007, and I don't believe that this check received 5 years later can be used to revise that capital loss. Moreover, a revision of this capital loss with a 2007 1040X would change the capital loss carried forward and require a revision of my 2008 tax return. Though I'd obviously like to find some way not to have to pay tax on this settlement check, I'm guessing that I'll have to report it as ordinary income.”============= I guess you are correct and I was wrong. UNLESS you can(should) file your amended return(not in this particular case), you do not report your ordinary income that you receive in 2012 on your 2007 return. It was my bad; you are accurate.
NOTE: when a SH sells shares back to company higher price than cost basis, then this type of settlement produces for him a long-term capital gain, because it would have increased the sale price of his stock when he sold it back to the company. He needs to report the settlement as a long-term sale with cost basis equal to $0 on Part II of Sch D/form 8949. Then, he should file an amended federal tax return (Form 1040X) and its equivalent for his state, if he lives in a state that has state income tax. If the resulting calculations say he owes tax, pay it with the Form 1040X.

“I will try to get an answer from the IRS (haven't had good experience in getting answers from the IRS before) and the local AARP tax aide. I do my own tax returns, and certainly don't want to pay an accountant just for this one question over a relatively small amount. If you can figure out a definitive answer or have additional thoughts, I'd appreciate it. I plan to post what the IRS and AARP tell me, and what I end up doing.”========= I guess you need to contact the IRS for more info in detail.

I finally got through to the IRS department that handles Forms 1099-DIV. The IRS guy told me that this should be reported as a capital gain. When I questioned why it wouldn't be treated as ordinary income, he put me on hold and consulted Pub. 525 (Taxable and Nontaxable Income) under "Other Income," and "Court Awards and Damages" on page 29 and quoted, "The character of the income as ordi*nary income or capital gain depends on the na*ture of the underlying claim." Since the underlying claim was based on a capital loss, his reasoning was that this litigation distribution should be classified as a capital gain. He didn't sound very authoritative, and when I questioned him, it seems as if he could have been persuaded either way. For instance, he initially said it should be classified as a short term capital gain, but when I argued that the purchase was 5 years ago, and that it should be a long term capital gain, he didn't argue. I haven't been able to talk to a AARP Tax-Aide person, but I found some answers to similar questions by doing a web search for "securities litigation tax treatment" and found that "capital gain" was repeatedly advised for tax treatment of this kind of distribution, though no answer appeared wholly authoritative, and my impression is that this is not a straightforward issue that even tax professionals would know the definitive answer, much less IRS drones, and I think that however I classified it, it wouldn't be questioned by the IRS as long as I didn't ignore it on my return. Anyway, to my glee, I found that when I classify this as a capital gains distribution (and therefore don't have to file a Schedule D since I have no other capital transactions to report), the distribution isn't taxed! I don't understand the formula on the "Capital Gains Tax Worksheet" for figuring tax on Line 44 of Form 1040, but my taxable income is below the threshold for single filers of $35,350 on Line 8. And the distribution of ~$1200 wasn't high enough to trigger tax. Apparently, if my taxable income had been high enough, and/or the distribution had been high enough, the distribution would have been taxed at a 15% rate. This reclassification of this litigation distribution from ordinary income (as you and I had thought to classify it last time) to a capital gain distribution saves me ~$180 in tax. Woo hoo! So, I will report this on Line 13 of my 1040, instead of Line 21.