Tax & EvaluationQuestion 95 of 110
A fund makes a distribution characterized as a return of capital. The immediate effect on the shareholder is:
a.Ordinary income tax on the full amount
b.A long-term capital gain equal to the distribution
c.An increase in the shareholder's cost basis
d.A reduction in the shareholder's cost basis, with no current tax
Explanation
A return of capital is the investor's own money coming back, so it is not currently taxable but it lowers basis, which increases the taxable gain on a later sale. Once basis reaches zero, further return of capital distributions become taxable gain. Treating it as income or as a current capital gain double counts the tax.
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