Joshua Wu was quoted in Credit Karma regarding the tax treatment of dividends and return of capital.
According to Joshua Wu, tax partner at Greaves Wu, a law firm specializing in tax matters in Washington, D.C., there are two types of dividends.
“Ordinary dividends are paid from earnings and profits of a corporation and are taxed at ordinary income tax rates,” he explains. “Qualified dividends are taxed at a special rate, [0, 15 or 20 percent] depending on the taxpayer’s situation, and are reported separately on Form 1099-DIV.”
Joshua also noted that:
Although return of capital is included in Box 3 of Form 1099-DIV, Wu says a return of capital is generally nontaxable. “The recipient reduces the cost basis of his or her stock by the nondividend distribution,” he says. “If the taxpayer’s basis is reduced to zero, then any further distributions are taxable as capital gains.”
The full article is available here.