Return of Capital Explained: How ROC Distributions Lower Your Cost Basis
Return of Capital Explained
Part of a fund's distribution may be your own money handed back (return of capital, or ROC). It usually isn't taxed when paid, but it lowers your cost basis. Enter your numbers to see the new basis.
Where distributions come from
| Source | Usual tax treatment |
|---|---|
| Net investment income (dividends, interest) | Ordinary or qualified dividends |
| Realized capital gains | Capital gain distributions |
| Return of capital | Not taxed now; lowers basis |
- A Section 19a notice estimates the sources when a distribution is paid. The final split shows up on your 1099-DIV, box 3.
- ROC can come from option premium that gets taxed differently at the fund level, or from paying out more than the fund earns. The second kind shrinks the fund.