Distributions from investments come in a variety of flavors. While dividends and interest income are common, you could receive a non-dividend cash distribution from a stock or a mutual fund. If you get that kind of return you'll see the amount in box 3 of the annual Form 1099-DIV from the distributor.
Dividends are defined as distributions of company income to shareholders. If a company distributes cash to investors in excess of their earnings and profits, they can't call it a dividend. Instead, it's referred to as a non-dividend cash distribution and is considered a return of capital. Non-dividend distributions reduce your basis in the stock -- its original value adjusted for stock splits, dividends and distributions. If the company's distribution amount per share is higher than your basis in the stock, you must record a capital gain for tax purposes.
Capital Gains Calculations
To determine whether you need to pay capital-gains tax on your distribution, calculate your basis in the shares the distribution applies to. Let's say you paid $1,000 for 50 shares of stock and received a $200 distribution. Your original basis in the stock is $1,000 divided by 50, or $20 per share. Your adjustment is $200 divided by 50, or $4. Your new basis is $20 minus $4, or $16 per share. Since the distribution is less than the basis, you don't have a capital gain and no tax is due.
If you don't receive dividends on your investments or you receive them in cash, you don't have to worry about including them in your basis. However, if your dividends are reinvested, they contribute to your basis in the investment. Say you received $400 in dividends from your $1,000 that's reinvested in stock. You'll divide $1,400 by the total shares of stock to find your basis, then subtract any distributions from that number to find your basis after the distribution.
If you didn't have a gain from your non-dividend distribution there's nothing more to do. The Internal Revenue Service (IRS) doesn't require taxpayers to report non-dividend distributions if they don't create a capital gain. That's usually the case because distributions tend to be smaller than the shareholder basis. However, ending up with a capital gain means you'll need to pay taxes on it. A capital gain is the amount by which the distribution exceeds your basis in the stock. For example, a $1,300 distribution on a stock basis of $1,000 creates a $300 capital gain. Individual taxpayers report capital gains on Schedule D of IRS Form 1040.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.