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Mutual Funds (Costs, Distributions, etc.)

Question: How does the return of principal payments affect my cost basis in my mutual funds?


This return of principal payments is often referred to as either "return of capital" or "non-dividend distributions." As a return of your original investment (cost), they reduce your basis.

  • Basis, however, cannot be adjusted below zero.
  • Once you have adjusted your basis to zero, any additional returns or distributions (other than dividend distributions) are reported on Schedule D (Form 1040) (PDF), Capital Gains and Losses, and Form 8949 (PDF), Sales and Other Dispositions of Capital Assets.

Additional Information:

Category: Capital Gains, Losses, Sale of Home
Subcategory: Mutual Funds (Costs, Distributions, etc.)

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The OMB number for this study is 1545-1432.
If you have any comments regarding this study, please write to:
IRS, Tax Products Coordinating Committee
1111 Constitution Avenue NW
Washington, DC 20224