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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?


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 can't be adjusted below zero. This information may be reported to you on a Form 1099-DIV, Dividends and Distributions, in box 3.

Once you've 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.

Additional Information:

Category: Capital Gains, Losses, and 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