What is a non dividend distribution?

A non-dividend distribution, also known as a non-taxable distribution or return of capital, is a form of payment made to shareholders by a corporation that is not classified as a dividend.

Unlike dividends, non-dividend distributions are not considered taxable income for shareholders. Instead, they are a return of the shareholder's original investment in the corporation. This means that the distribution is tax-free until the shareholder's cost basis in the investment is fully recovered.

Non-dividend distributions typically occur when a company wants to return capital to its shareholders without generating additional taxable income for them. This can happen when a company has accumulated earnings or profits that it wishes to distribute or when it sells off assets or realizes gains that are not directly related to its normal business operations.

While non-dividend distributions are not taxable in the year they are received, they do affect a shareholder's cost basis in the stock. The cost basis is used to calculate the taxable gain or loss when the stock is eventually sold. Therefore, when a non-dividend distribution is received, the shareholder reduces their cost basis by the amount of the distribution.

It is important for shareholders to keep track of their cost basis and any non-dividend distributions received to accurately report their tax obligations when selling the stock. A tax professional or financial advisor can provide guidance on how to properly account for non-dividend distributions and their implications for tax purposes.