Non-dividend distributions are not paid from a corporation’s earnings and are not taxable income. These should be reported in box 3 of Form 1099-DIV. These distributions are actually a return of capital and reduce your basis in the stock, until all your investment is recovered. If you buy stock in different lots at different times, you should reduce the basis of the earliest purchases first.
Once all your basis has been recovered, any additional non-dividend distributions would be reported as capital gains, either short-term or long-term, depending on how long you held the stock.
Liquidating dividends are another form of non-dividend distributions and would be treated in the same manner. Liquidating dividends should be reported in box 8 or 9 of Form 1099-DIV.
If you own more than one block of stock in a corporation and you receive a complete liquidation distribution, you divide the distribution among the blocks of stock you hold in proportion to the number of stocks in each block. If the distribution is more than your basis, you would have to report the difference as a capital gain. On the contrary, if the distribution is less than your basis, you may be able to claim a capital loss.
Stock Dividends and Stock Rights
Generally, dividends in the form of additional stock in the corporation or stock rights or options are not taxable. They would only be taxable if:
You or any other shareholder could choose cash or other property instead of stock or stock rights.
Some shareholders receive cash and others receive a percentage increase in their shareholdings.
The distribution is in convertible preferred stock.
Some shareholders receive preferred stock and others receive common stock.
The distribution is on preferred stock, except when it is an increase in the conversion ratio of convertible stock, in order to take into account a stock dividend or stock split.
If your stock dividend is taxable, it would be included in your income at its fair market value at the time of distribution. Also, if the stock dividend is not taxable, your basis in the stock or stock right received is its fair market value at the time of distribution.