[GNC] Return of capital, lots & accurate gains

[Kalpesh Patel]

You are correct that they need to issue a 1099 by mid-February which is caveated that it is preliminary one, and final one coming later when they have handle on RoC.

Unless I am mistaken here, on 1099-DIV they provide RoC on line 3) Nondividend Distributions. Even if the distribution of RoC is  more frequent than yearly, it would be  denoted in the accompanying  statement as such. I guess it ultimately dependent on servicer, and their process how they handle it. I normally see  RoC play out in REIT mutual funds more often than not, but I also see it in investments available to accredited investors.

-----Original Message-----
From: John Ralls <jralls at ceridwen.us> 
Sent: Sunday, March 30, 2025 7:46 PM
To: stepbystepfarm at comcast.net
Cc: gnucash-user at gnucash.org
Subject: Re: [GNC] Return of capital, lots & accurate gains



> On Mar 30, 2025, at 12:32 PM, Michael or Penny Novack via gnucash-user <gnucash-user at gnucash.org> wrote:
> 
> On 3/30/2025 3:16 PM, Kalpesh Patel wrote:
>> 
>> I was under the understanding that the effect of return of capital (RoC) is that the capital gains get postponed until when you sell the commodity, and that the cost basis gets reduced by it when RoC is distributed.
>> 
>> In the States, the financial servicer should not be sending a dividend statement, and re-characterize it as a RoC at another time - they are two different things and are treated differently for the tax purposes.
>> 
>> I normally go back to the original purchase transaction and readjust the cost basis for them. It does become a bit cumber some if multiple lots are involved but I believe that is the correct treatment of it. I welcome weigh in from pro's than I am.
> 
> Correct ---- You debit cash (for the check received) and credit the basis. LATER (when eventually sold) will affect capital gains since you subtract the (remaining) basis from the sale price.
> 
> However -- terminology can be historic, so a return of capital distribution is still called a "dividend". Perhaps because at the corporate level the same rules apply? << becomes a liability when declared by the BOD, that is almost certainly well before the date when to be paid out.>>

The following is a totally USA perspective. I have no idea if other countries even allow returns of capital:

I think it depends on the type of security. If the investment sends you a K-1 then it can do returns of capital. If it sends (or causes your broker to send) a 1099 then it pays a dividend or interest.

A return of capital isn’t a capital gain, it’s a reduction in basis, at least in theory and only until they’ve given you back all of your investment. Once that happens then it turns into ordinary income.

But things get messy when you invest in a mutual fund that in turn invests in private equity or master limited partnerships. K-1s aren’t due until the end of February (and I’ve gotten them as late as mid-March). Until the fund gets the K-1s and runs the numbers it doesn’t know how much of what it paid to its customers in the last year was RoC… but it had to issue the 1099s by mid-February so they have to issue revised ones after they’ve punched in the K-1 numbers.

Regards,
John Ralls