Mutual Funds (Costs, Distributions, etc.)
Question: How does the return of principal payments affect my cost basis in my mutual funds?
The return of principal payments is often called either a return of capital or a nondividend distribution. As a return of your original investment (cost), it reduces your basis. However, your basis cannot be adjusted below zero. This information may be reported to you on a Form 1099-DIV, Dividends and Distributions, in box 3.
Once you have adjusted your basis to zero, report any additional returns or distributions (other than dividend distributions) on Schedule D (Form 1040), Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets.
Category: Capital Gains, Losses, and Sale of Home
Subcategory: Mutual Funds (Costs, Distributions, etc.)