I have an amount in Box 3 non dividend distributions. Is that reportable/requiring an adjustment somewhere?

Forum|Forum|6 years ago
June 1, 2019
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TurboTax Self Employed Online

GeoffreyG

Employee

Actually, you won't report your non-divided distribution to the IRS, and you won't enter it on your tax return. Please allow me to explain.

A non-dividend distribution is just another way of saying "return of capital." It is meant for your information only, and that of your brokerage or financial firm. A non-dividend distribution, you see, is a return of some portion of your original investment; and as such you would need only to reduce the cost basis of your stock, bond, mutual fund, other security, etc. This adjustment does matter in future tax periods, because it is the difference between basis and net proceeds on which capital gains taxes are applied. Perhaps a numerical example will be illustrative.

Let's say you buy a single share of stock at $100. That's your original cost basis. Then, one day your company issues you a non-dividend distribution of $20. Your stock's adjusted basis is now $100 - $20 = $80. When you later sell your share of stock to an unrelated third-party for $110, your taxable capital gain is now $30 (the difference between $110 and $80), and not $10 (the difference between $110 and $100). Does that make sense?

The IRS instructions for Form 1099-DIV Box 3 will tell you much the same thing:

https://www.irs.gov/pub/irs-access/f1099div_accessible.pdf

Another way of looking at it is you have simply been given back part of your original investment. If you were to receive a 1099-DIV statement, with an amount printed in Box 3 (non-dividend distribution), then you could certainly type that number into the TurboTax data entry screen for the 1099-DIV tax form . . . but it won't actually do anything. Quite honestly, the Box 3 entry field is put there only to make our customers feel more comfortable that TurboTax is accurately capturing their tax information. That is the whole purpose.

However, the important thing to note about a non-dividend distribution, and something that does require action, is that of the taxpayer's own recordkeeping. If you have a brokerage firm holding this asset, it is likely that they will adjust the cost basis for you in their records (and thus in yours too). But if you hold this asset on your own, outside of any financial institution, then you'll need to adjust your own basis and own records.

What you will not have to do, however, is to either enter or disclose this item anywhere on your tax return, either federal or state (if applicable).

Thank you for asking this important question.

Aquarius5

Do we just trust our broker to eventually adjust the cost basis accordingly as you described once they report the 1099 to the IRS?

I received some non-dividend distributions but did not seem to notice my broker (Ally Invest) adjust the cost basis of my shares at all, at least based on their web-based view of current tax lots.

sls50211

You can contact the broker to discuss their policy on non-dividend distributions. You may need to track them yourself. They should be able to manually adjust down the basis for the non-dividend distributions received. They will not be taxed until cost or other basis is completely recovered. Reduce cost or other basis by these distributions. If the taxpayer gets back all cost or other basis, report the excess distributions as capital gains.

The 1099 Series are informational reporting forms submitted to the IRS by third parties. The IRS then matches the form information to your tax return to insure all income is reported and taxed. If you do not include a 1099 received from a third party on your tax return, you will receive a notice from the IRS asking why. This is the CP2000 matching notice. If you receive this notice from the IRS, make sure and respond by the date indicate on the notice.