What is Cash Liquidation Distribution
A cash liquidation distribution is the amount of capital that is returned to the investor or business owner when a business is liquidated. When a company goes out of the business and the company assets are liquidated, money is returned to investors per the capital structure of the business. If money is left after paying bondholders, stockholders are paid a portion of the money. Funds received by investors up to their cost basis in the stock is considered a non-taxable return of principal. Amounts above and beyond the investors' cost basis is a taxable distribution. Credit unions send this sort of distribution to their depositors when they are liquidated as well.
BREAKING DOWN Cash Liquidation Distribution
Proceeds from a cash liquidation distribution can be either a non-taxable return of principal or a taxable distribution, depending upon whether or not the amount is more than the investors' cost basis in the stock. Proceeds from cash liquidation distributions are reported on Form 1099-DIV. Any taxable amount the investor receives is reported on Schedule D, the capital gains and losses statement that is filed with the IRS form 1040 during yearly tax filings. If the amount the investor receives is less than their original cost basis invested in the stock, the investor may report a capital loss which reduces their tax bill.
Example of a Cash Liquidation Distribution
XYZ Company is going through liquidation. Bert and Ernie are shareholders. Bert's cost basis of his shares in XYZ Corp. is $50. When Bert receives a cash liquidation payment of $75, $50 of that is a return of capital and is not taxable. $25 is a gain and is taxable. Ernie has an original cost basis of $100. When he receives his payment of $75, it does not cover his original cost basis in the stock, so Ernie has a loss of $25.