Holding an infrastructure fund. This quarter's distribution is labelled return of capital and my average cost per share fell by about the same amount. Nothing else changed. I thought return of capital meant the fund was handing me back my own money, which sounds bad, and yet people describe it as a tax advantage. Which is it, and why does the basis move?
Watch what happens if your basis reaches zero — from that point distributions are generally taxed as capital gains rather than reducing basis further. If you have held a high ROC fund for a long time this sneaks up on you. Track your own basis rather than trusting the broker, because they get this wrong on transfers between platforms.
Learned this the hard way after moving accounts. My new broker had a basis that was simply wrong and it took months to sort out.
Something people miss: the reported character can be reclassified after year end. What shows as return of capital on a quarterly statement can be restated as income or gain on the annual tax document, so do not plan off the quarterly line.
@hollis_pike · 7mo ago · 3 replies
Both, depending on why they are doing it. Mechanically it is simple: return of capital is not treated as income when you receive it, so it is not taxed now, and instead it reduces your cost basis so you pay a larger capital gain when you sell. It is a deferral, not free money. Whether it is a red flag depends entirely on the fund. Certain structures — property, pipelines, funds with heavy depreciation — generate genuinely non-taxable distributions as a normal part of their accounting. A fund paying out more than it earns and labelling the shortfall as return of capital is eating itself. Look at whether distributions exceed cash flow year after year. This is also exactly the sort of thing where an hour with an accountant is worth it, because the treatment varies a lot by country.
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@pressuretank_pia · 7mo ago
That split between accounting ROC and destructive ROC is what I was missing entirely.
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@hollis_pike · 7mo ago
The annual report usually has a distribution characterisation table that answers it in one page. Not fun reading, but it is right there.
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