DEFINITION of 'Nontaxable Distribution'

A type of dividend that is paid to shareholders of a corporation not as a result of earnings, but as a return of capital. Nontaxable distributions can also include stock received from a spinoff. Dividends paid to cash-value life insurance policyholders are also considered nontaxable returns of capital.

BREAKING DOWN 'Nontaxable Distribution'

Shareholders who receive nontaxable distributions must reduce the basis in their stock accordingly. Upon the sale of the stock, the resultant gain or loss will be calculated from the adjusted basis. Nontaxable distributions are generally reported in box 3 of the Form 1099-DIV.

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