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ETF Taxation

ETF return of capital distributions have a weird tax perk no one talks about

Return of capital grants investors access to portfolio basis. That's very rare.

Brent Sullivan· · 3 min read
ETF return of capital distributions granting investors rare access to portfolio basis

I was on Dave Nadig’s podcast last week.

Here’s the video…

You can also read his lengthy write-up on return of capital.

Return of capital basics

Here’s my visual guide to return of capital.

In one line: Return of capital is a distribution beyond what an ETF earned.

Examples:

  • If an ETF made 6% but distributed 8%, 2% is return of capital.
  • If an ETF made -10%, but distributed 8%, 8% is return of capital.

This is a simple illustration of return of capital creeping into distributions.

Return of capital is often marketed as a tax strategy since the distributions (technically, “nondividend” distributions) are not taxed.

IRS Pub 550

That’s a rare bird in the investing world.

BIRDS OF PARADISE - Collectors Edition - PSA Mint 8 - MTG Magic Cert #: 12281220 $225.00 - PicClick
Another rare bird

Let’s see why…