What does "Return of capital mean?"?

Question

I own a few shares of stock that pay me a small dividend regularly. Now the company has sent me a bigger check saying it was a return of capital. I still have the stock. What does this mean?

Answer 1

The company has returned some or all of your initial investment. As such your cost basis has to be reduced to reflect the amount received. For example, if your bought 10 shares of ABC Co. at $10 plus commission ($9.95) your original cost was $109.95.

If the company sent you $20 as "Return of Capital" (non-reportable income) your cost basis would be $89.95, or $8.995/share. When you sell, you will be charged anothr $9.95 commission raising the cost basis to $99.90. If you sell for more than that it would be a capital gain (long term if held more than 12 months); if sold for less than it would be a capital loss.

If they continue to return capital to the extent that it equals or exceeds your initial investment then all other return of captial becomes income. For example if they continue to send you $20 for the next six years ($120) and your cost basis is $99.90, at the sixth year your will have additional income of $20.10 to report.

I recommend that you purchase additional shares, either with additional funds, or use the dividends (if company has dividend reinvestment with optional contribution feature, sign up) and Returned Capital. This method will insure that you never will have to report additional income if the company continues to return capital.

Answer 2

This is an uncommon event. The company probably just sold some big asset or part of the company and instead of keeping the cash to reinvest -- they are sending it out to the stockholders. So you probably have some nice capital gains tax due now. You should go look up the stock on internet if they are public and see what they are up too... they should have details telling you what they did.

Answer 3

Capital is the money you invest initially. They returned the original amount you invested.

Answer 4

i think you mean 'return on capital'.....that's profits