Non-Dividend Distribution

Non-dividend distributions lower your cost basis.

Let’s say you own one stocks, S. You have $500 of S. S pays a non-dividend distribution of $25. So you started with $500, and ended up with $525.

What is your tax on the $25? Since S paid a non-dividend distribution, we owe no tax.

That leaves us with $525, right?

Hold your horses! We need to reduce our cost basis, first! By $25!

Our cost basis now is $475, and have $525. (Not cash we can buy food with, we haven’t sold anything yet).

Don’t get too excited.

If you do the math to compare what’s better, you get more dollars from the non-dividend distribution - Until you sell the shares. Then you pay tax on sale price - cost basis (which can be negative, meaning you deduct less of a loss).

That’s all well and good, but we didn’t discuss share price, and are just buying to hold. So let’s consider something more relevant.

Say we hold our S shares for 20 years, with the same $25 a year in non-dividend distribution. Our cost basis is finally $0. That’s right, we were able to get back our investment over time and spend it, without being taxed!

Going forward, since our cost basis is now 0, we can expect to pay capital gains tax on our annual $25.

TLDR
Non-dividend distribution is a separate thing, and you can literally ignore it.

For real, the IRS doesn’t give a shit about line 3 on your composite 1099.