Handling Return of Capital for CEF distributions

[surprising]

I own several CEFs. When it comes to tax time, the CEF distribution is a combination of income, LTCG, STCG and ROC (return of capital). ROC is untaxed. What seems pretty common is the 1099-DIV I get from my brokerage does not do the breakdown of tax treatment correctly for these CEFs. What is also common is it's very difficult to find this information on the funds website. I own a fund called PDO and spent a bunch of time looking for ROC details. There is a form 8937 that they are supposed to file detailing the return of capital distributions. I found that for PDO, the first 5 months of 2024 had nearly 60% of the distribution as Return of Capital.

My 1099-DIV shows 0 return of capital, so I will have to correct that. I am also very concerned with such a high 60% return of capital, which shows that at the beginning of the year they could not come close to funding the distribution with income. Most likely I am going to sell this fund as it could be in danger of dividend cut.

 

[Ian S]

Return of capital generally doesn't impact your taxes until you sell the CEF and then it reduces your cost basis. Unless you are absolutely certain that an error has been made, I'd just take the numbers from the 1099 as correct. Keep track of the running total of return of capital for future tax calculations. In any event, until you sell the stock, there should be no impact on your taxes. Keep the 1099s in case you are ever audited but it's highly unlikely you'll encounter problems. FYI, I pretty much gave up on CEFs some time ago. Costly fees, premium/discount to track and the return of capital complication. Not worth it IMHO.

 

[surprising]

That's interesting. I have another fund that also had ROC distribution as shown on their 8937 and it was reported on line 3 of my 1099-DIV "Non-dividend distributions" and the amount correspondingly reduced from line 1a "Total ordinary dividends", so it can definitely impact your taxes. Essentially you're deferring the gains of the return of capital to when you sell, where it will impact your capital gain/loss due to the cost basis adjustment. But the reward for doing that is reduction of dividends in the current year, which will help reduce taxes. If you do all your buying/selling within a single brokerage account, they are supposed to keep track of the adjusted cost basis for you, so you shouldn't have to.

But it still doesn't answer why the fund I mentioned in the original post did not report the ROC correctly on 1099-div.. And should I just ignore it or manually do the adjustment and tracking?

.... Ahhh okay, I see the issue now! I purchased this fund in Sept so I didn't even own it when the ROC distributions were made in the first 5 months. I feel dumb.

 

[RobLJ]

I bought PDO in early '23 and had no ROC on the 1099 from Schwab for '23 or '24.
The two CEF funds I have had minimal ROC are BUI (infrastructure and utilities CEF) and DBL (Doubleline Opportunities).
As someone posted, just go by the 1099 you receive from your brokerage. We (most) are not forensic accountants, so you are filing in good faith based on your brokerage statements. I think ROC in a few months can be erased by the yearly totals--but I'm not an accountant (my DW was, but she leaves all this tomfoolery to me).

 

[Flute McG]

Even if your holding period overlapped the ROC distributions, Pimco (and others) do a lot of fancy footwork and distributions USUALLY get RECHARACTERIZED after the end of the year. It is this final number that they report to your broker. The income Pimco receives from the bonds they invest in may be very "lumpy" and it may be just a timing issue of them paying dividends on income they haven't got yet. I'm going way out on a limb here. Any accountants here to set us straight?