[GNC] Return of capital, lots & accurate gains

[Chris Williamson]

Hi. I have a question for someone who understands how to adjust the cost basis 
of a lot in GnuCash, so that it can accurately calculate the Realized Gain/
Loss transaction.

In my brokerage cash account, I received some payments the brokerage listed as 
dividends. The company that paid these cash distributions later reclassified 
them as returns of capital. How do I create adjusting transactions that link 
these return of capital payments to their corresponding stock lots in GnuCash, 
so that it both accurately recalculates Realized Gain/Loss on the shares I’ve 
already sold and accurately calculates Realized Gain/Loss when I sell the 
shares I still own?

Here are more details:

I have used GnuCash to keep track of my personal finances for 20 years, 
including buying and selling stock for the last 5 years.

When I buy stock, I use the Lots in Account window to create a new lot and 
link the buy split to the new lot.

When I sell stock, I usually let the brokerage automatically identify the 
lot(s) to sell from, which it does using the first in, first out method. Other 
times, I choose to sell from specific lots. Before recording a sale in GnuCash, 
I open my web browser to the closed positions screen in my brokerage account. 
Then, in GnuCash, I link the sell split to the same lot the brokerage sold 
from, and GnuCash automatically creates a Realized Gain/Loss transaction, 
which I check against the gain/loss the brokerage shows. This way, when the 
brokerage gives me my annual tax reporting statement, I can reconcile it with 
my realized gains/losses in GnuCash and know the brokerage has reported the 
correct amounts to the government.

The last 2 years, I have found that the gains for one particular company’s 
stock listed on the brokerage’s tax reporting statement no longer match the 
gains I had been carefully double-checking in GnuCash after each sale. I 
learned that this company had reported to the government that its quarterly 
cash distributions, which appeared in my brokerage account as dividends, were 
“distributions to its shareholders in excess of its current and accumulated 
earnings and profits”. In other words: the dividends were reclassified as 
returns of capital. The brokerage made adjustments to reduce the cost bases of 
the shares I owned as of the distribution record dates, and the lower cost 
bases increased realized gains.

In the GnuCash Tutorial and Concepts Guide, the part on The Common Usage, in 
the Investments chapter, there is a Return of Capital page. It advises to 
enter, in the stock register, one split of 0 shares at 0 price, with the value 
of the return of capital payment received in the Sell (credit) field. The guide 
says the other side of the double entry would usually be a debit (Buy field) to 
the brokerage cash account.

The guide also says, “It is not possible to use the Stock Split Assistant to 
do this type of transaction.” However, in the GnuCash Manual, in the Tools & 
Assistants chapter, on the Stock Transaction Assistant page, under “Types of 
stock transactions supported by the Stock Transaction Assistant”, one of the 
items is Return of Capital. And in GnuCash, in the stock register, in the 
Actions menu, when I select Stock Assistant…, on the assistant’s Transaction 
Type page, in the Type drop-down list, there are both a “Return of capital” 
item and a “Return of capital (reclassification)” item. When I choose “Return 
of capital (reclassification)” and step through the pages of the assistant by 
clicking the Next button, the assistant allows me to enter information on the 
Stock Value, Fees and Dividend pages. The assistant skips over the Capital 
Gains page, with no way to get to it. The last page of the stock assistant 
shows a summary of the splits it will create. The credit split is what the 
Tutorial and Concepts Guide advised me to enter manually; the debit split goes 
instead to the dividend income account.

Neither the advice in the guide nor the stock assistant results in splits I 
can link to lots, since only splits with nonzero shares appear in the lots 
window.

Looking back at how I handled this issue last year, it appears that, for each 
distribution payment I received, I deleted the dividend split. Then, for each 
sale before I the date I received this return of capital, I created a separate 
capital gains income split with the amount of additional gain to credit to 
those shares. That would have given me two gain splits to reconcile with each 
of these transaction gains listed on my brokerage tax reporting statement. For 
each lot I continued to own, I created two splits: one selling for its 
original cost basis and another buying for the lot’s adjusted, reduced cost 
basis. Then in the lots window, I closed the still-owned lots at their 
original cost bases, generating no gains/losses, and opened new lots at their 
adjusted, reduced cost bases. I used lot titles and notes to help me keep 
track of the connections between the new and old lots. E.g.: If Lot 20 was the 
original cost basis, then Lot 20-a was the adjusted cost basis, and the actual 
purchase date of the shares was the Lot 20 opened date.

(In the past, when I have tried to link adjusting splits to existing lots, 
things quickly ended up extremely scrambled. Thus the strategy above, which 
avoids messing with existing lots other than to simply close them at their 
original cost. I often do this to adjust for wash sales, too. That’s a subject 
for another day.)

Anyway, am I missing some easier/better way to handle this kind of 
reclassification of dividends as return of capital, which would allow me to 
continue keeping track of lots and double-checking my gains in GnuCash against 
what my brokerage shows?

Thank you!

Sincerely,
Chris Williamson