Return of Capital
Return of capital is a distribution that is usually not taxed as a dividend this year and reduces your cost basis. It can still be cash in the account.
What it is
Funds estimate tax character during the year and finalize it later. A 19(a) notice is a clue, not the final 1099.
ROC is common in some option-income products. Spending it as “yield” while NAV falls is how people eat principal and smile.
Hypothetical: $800 ROC on a $10,000 position
Labeled hypothetical — not a live yield, AUM, or tax bracket.
- You receive $800 classified as ROC. Cash is up $800. Basis falls from $10,000 to $9,200 in this toy example.
- You did not “earn” 8% in the dividend sense. You may owe more capital-gains tax later when you sell.
- If NAV also fell, you may have funded the cash from assets. Covered-call list + NAV calculator is the next click.
Who this is for
- Holders of overwrite and target-distribution ETFs in taxable accounts.
Who this is not for
- Treating ROC as always abusive or always brilliant.
What people get wrong
- Seeing a cash deposit and calling it a qualified dividend.
How to check it on Dividend Wealth
Covered-call ETFs are where this shows up most on our site. Then the NAV calculator.
Related lessons
- Qualified Dividends · Taxes
- Understanding NAV Erosion · Advanced Risk
- Why High Yield Doesn’t Mean High Income · Dividend Terms
FAQ
What is return of capital?
A distribution classified as a return of your investment rather than a dividend. It typically reduces cost basis and is not taxed as a dividend in the year received.
Is ROC bad?
Not automatically. It can be tax-efficient. It is bad if you spend it as “yield” while NAV is shrinking and you ignore the basis reduction.
Which funds often show ROC?
Many option-income and covered-call ETFs. Check 19(a) notices and year-end tax character. Start on the covered-call list, then the NAV calculator.
Educational only — not investment, tax, or legal advice. Dividend Wealth does not recommend 2x daily, inverse, or single-stock YieldMax products as “best income.” Yields change. Confirm filings and your own tax situation.