Tax Playbook · Investment tax wins
Return of capital: the tax bill that waits
Some payouts are return of capital — you are just getting your own money back, so you owe zero tax today, and your cost basis simply drops (a $2 payout on a $100 basis makes it $98). The tax bill waits until you sell: held over a year, that gain is taxed at the lower long-term capital gains rate instead of the higher income rate — deferred and discounted. Reinvesting the payout quietly builds newer, higher-cost shares, so a later sale can be cheaper. The catch: basis cannot fall below zero — past that, further RoC is taxed as a capital gain — and beware funds that pay out more than they earn, because that erodes the fund over time.
Good for: Investors receiving fund distributions in a taxable account who want to keep more of each payout.
Learn the basics
Recent articles & guides
- IRS: How return-of-principal payments affect cost basis
- Investopedia: Understanding Return of Capital (ROC)
- Taxes for Expats: Form 1099-DIV guide — Box 3 nondividend distributions
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Educational summary, not tax advice. Limits and rules change — confirm current law with your tax adviser.