How does a 1099-DIV Box 3 work? Especially once it totals my original investment

[chuckster]

One of my investments sent me a 1099-DIV, with my income for the year in Box 3, "nondividend distributions". This is a "return of capital" that is not taxed, but reduces my cost basis. My understanding is, once the cost basis is reached, any future income is to be taxed as a capital gain.

My question is, will the Payer keep track of if/when my Box 3 non-dividend distributions pass the amount of my original investment? Or is that on me to track? And, if so, once I pass the amount of my original investment, should I pencil in the Box 3 total into Box 1 (ordinary dividends) instead? TurboTax hasn't offered to track my shrinking cost basis or seem to have a place to make any adjustment, so, I wasn't sure how this would be handled once I cross that threshold.

[markbike528CBX]

Can't answer all these questions.
I wool note that if you had dividends rolled over, those add to your cost basis.
Your cost basis may be more than the cash you paid for the asset.

[phildonnia]

I had the same question! 

Some years ago, I had a large "non-dividend distribution", and the brokerage didn't say anything about it except to report it in Box 3.  Fortunately, I was able to keep track of my cost in that case, and report part of it it correctly as a capital gain.

In 2019, I had a different "non-dividend distribution" that, as far as I can tell, did not exceed my basis, but the brokerage reported it on 1099-B, and instructed me to report it as a capital gain.  I have no idea why, because as I said, my basis was nowhere near zero.

I'm sorry to say, in spite of all the work I do to try to follow the numbers, the 1099-DIV is still something of a black box to me.

[chuckster]

Well, according to this link I have to manually enter it myself in TurboTax as part of the "stocks - other" interview section: https://ttlc.intuit.com/community/retirement/discussion/what-do-i-do-if-non-dividend-distribution-in-box-3-exceeds-basis/00/671394 and also here: https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/how-do-i-report-capital-gains-on-non-dividend-distribution-the-1099-given-me-will-not-be-correct-and/00/112804

(Posting so that hopefully I remember to check back here when it happens in the future! lol)

[MustacheAndaHalf]

My understanding is that cost basis is only used when you sell.  Dividends should not be affected.

Say you paid $1,000 for an asset that has gone up to $1,500.  If you sold, you would owe tax on $1500 - $1000 = your gain of $500.

If money is returned to you in a way that reduces your basis... that's like your initial investment being dropped from $1,000 to $900.  When you sell, you would owe tax on $1500 - $900 = your $600 of gains.  You receive money, but the tax impact is delayed.

That's how I would interpret it, but there's several people on this forum who could give an even better informed opinion.

[phildonnia]

My understanding is that cost basis is only used when you sell. 

This can come into play, even when you don't sell, when there are "non-dividend distributions", usually from a partnership or REIT.  This happens when you aren't selling your investment, but capital is being sold inside the partnership, and the proceeds given to you. 

Normally, this is not taxable, because you're basically getting your money back, and the partnership drops in value by the exact same amount.  However, the moment you start getting more back than you put in, it's a capital gain, even if it's reported to you as a non-dividend distribution.  Even if you don't personally sell.

The original question, I think, is asking who is supposed to keep track of the basis so you know to report the capital gain.

[chuckster]

The original question, I think, is asking who is supposed to keep track of the basis so you know to report the capital gain.

Yes, this is what I meant.

If I originally invested $100 in this partnership, and in 2019, there's a payout to the partners and my share is $80... I get a 1099-DIV with $80 in Box 3 as "non-dividend distributions". In 2020, say there's a windfall and my payout is $200. I get a 1099-DIV with... I assume $200 in Box 3 if the payer is not tracking my cost basis?... and then it's up to me to tell turbotax somewhere: "No, only $20 is a non taxable non-dividend distribution, and I owe taxes on the $180 above and beyond my original cost basis".

I haven't sold my stake of this partnership, yet, I do have to keep track of the dwindling cost basis, I assume, as the partnership progress.

At least that's my understanding of it so far. Right now just curious as I'm still in the red, but, for my own knowledge I'd like to be prepared should I ever get into the black on this.