Cost Basis and Return of Capital

iceboater

My Schwab account keep changing the cost basis on several of my stocks, after some research I found out that the stocks were sending a Return of Capital on the yearly 1099 reports to the IRA. Schwab was not sending me any money, they just took the RC money and keep it and lowered my cost basis. Understand their thinking. How do I enter the RC without changing my Cash Balance?
Iceboater

[Deleted User]

Do a Return of Capital transaction with the Transfer Account the same as the Account. The Amount is the cost adjustment (either positive or negative).  The Market Value is blank.

If you cannot enter the account in the Transfer Account field, then you would need to do a Cash Transfer Out or Cash Transfer In, to offset the cash that the RC transaction created.  The Transfer Account would be the same as the Account.

Tom Young

I'm pretty darn certain that Schwab wasn't keeping any of the Return of Capital money reported on the 1099-DIV.  Instead, what typically happens is that after the end of the year the company figures out that some of the money sent to you as dividends was actually a return of capital and the 1099-DIV is actually RECLASSIFYING some of that money from "dividends" to "return of capital."  I've been investing in dividend paying stocks for at least 40 years and have seen this sort of thing happen many, many times.

The proper way of handling this situation is that as of 12/31/XX you make two entries:

1. The first entry is a REDUCTION of dividends in the amount of return of capital reported on the 1099-DIV.  That is, you enter a dividend action but with a negative dollar amount.
2. The second entry uses the return of capital action with the same dollar amount as a positive number.

The result is a reduction of your cost basis without any change in the cash balance of the Account.

iceboater

Tom, someone is keeping the money. I was told that if I had my stock certificates, that they would send me the R of C money, however since Schwab has them, they get the money and just reduce my Cost Basis. When I sell the stock, then my profit will be higher. Reducing the cost basis for the stock after you purchase it will make it difficult to do any future cost basis calculations.
Jerry

q_lurker

I have never heard of the circumstances you describe. I agree with Tom’s assessment and comments. 

Without meaning any disrespect, I think what you were told about the difference if you held the certificates is a bunch of hooey. 

Perhaps identifying the security would aid the discussion.