QW2016: Problems with Return of Capital

Rick GumpertzRick Gumpertz Member
edited October 2018 in
QW2016 H&B R18.4:

If I have more than one lot of a stock and I receive a Return of Capital (ROW), QW16 appears to apply the ROC to just the oldest lot, not to EACH lot, when updating the basis for the lots.  This results in Quicken mis-computing the capital gains when I sell any shares (and also mis-computing the basis for each lot of the shares I have left).

This incorrect basis also messes up the per-lot basis used in the Add transactions that are automatically generated by Quicken in the destination account when one later transfers stocks from one brokerage account to another.

Return of Capital (RtrnCap / RtrnCapX) is normally (but not always) issued equally to all shares.  Hence, the default basis adjustment could be usually allocated to the lots in proportion to the number of shares in each lot.

Alternatively, and probably better, RtrnCap(X) could have a button like Sell, SellX, and Remove to allow one to choose which lots received the Return of Capital.  This latter solution would be more general and usable for transactions that are not the standard ROC distributions by the company.

It would, however, be useful for properly updating the basis for each lot in those cases where the ROC does not apply equally to all shares.  For example, the RtrnCap(X) transactions automatically generated by Quicken for stock spinoffs really need to apply to just one lot each!
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  • Rick GumpertzRick Gumpertz Member
    edited September 2018
    Until Quicken gets around to fixing this (if ever), does anybody have a usable work-around?  The only one I've been able to
    think of so far would be  to add two extra transactions (Remove followed by Add) for
    each lot to correct the incorrect basis for each.  This, however, would be
    obscure, hard to understand, and a pain to enter!
  • Rick GumpertzRick Gumpertz Member
    edited September 2018
    By the way, RtrnCap(X) should probably also generate an immediate Capital Gain transaction (possibly MiscInc(X) with category _RlzdGain??) for the case where the basis for one or more lots would would otherwise go negative (because the amount of the new ROC attributed to that lot would exceed the previous basis for that lot).

    Maybe better: make the _RlzdGain NOT be a separte transaction but rather an extra column in each line of  the Specify Lots screen that is automatically computed by Quicken as:
         MAX(ReturnOfCapitalAllocatedToThisLot - PreviousBasisForThisLot, 0)
    and, if non-zero, gets used as a _RlzdGain (like for a Sold) for the lot corresponding to that line.

    Why is this needed?  Because Return of Capital that exceeds a lot's previous basis is
    treated as a Capital Gain in the USA (and, I believe,also  in Canada).
  • Rick GumpertzRick Gumpertz Member
    edited October 2018
    Brief summary of the above:

    (1) RtrnCap needs to be lot-specific: it does matter which lot's basis is adjusted!

    (2) RtrnCap should automatically generate Capital Gains instead of allowing a lot's basis to go negative,
  • Tom YoungTom Young SuperUser ✭✭✭✭✭
    edited October 2018
    Returns of capital are a bit tricky so I don't know that Quicken can really write code in this situation that would work for everyone.  The IRS's instructions here are:
    -------------------------------------------------------------------------------------
    A nondividend distribution reduces the
    basis of your stock. It is not taxed until your basis in the stock is
    fully recovered. This nontaxable portion also is called a return of
    capital; it is a return of your investment in the stock of the company.
    If you buy stock in a corporation in different lots at different times,
    and you cannot definitely identify the shares subject to the nondividend
    distribution, reduce the basis of your earliest purchases first.


    When the basis of your stock
    has been reduced to zero, report any additional nondividend distribution
    you receive as a capital gain. Whether you report it as a long-term or
    short-term capital gain depends on how long you have held the stock.
    ------------------------------------------------------------------------------------

    So a FIFO allocation is allowed, but a different allocation among lots could also be OK.  As a practical matter it's certainly easiest to simply allocate returns of capital to the earliest lot but that could force you to recognize a profit when it's really not necessary.  If the security is a covered security then your broker has to allocate the dollars in some fashion so it might be helpful to look at that information and see how the broker has done this.  Unfortunately if the allocation is across lots then the only mechanism available to you are a series of "Remove" and "Add" actions to get all those lots squared away.

  • Rick GumpertzRick Gumpertz Member
    edited October 2018
    Tom Young said:

    Returns of capital are a bit tricky so I don't know that Quicken can really write code in this situation that would work for everyone.  The IRS's instructions here are:
    -------------------------------------------------------------------------------------
    A nondividend distribution reduces the
    basis of your stock. It is not taxed until your basis in the stock is
    fully recovered. This nontaxable portion also is called a return of
    capital; it is a return of your investment in the stock of the company.
    If you buy stock in a corporation in different lots at different times,
    and you cannot definitely identify the shares subject to the nondividend
    distribution, reduce the basis of your earliest purchases first.


    When the basis of your stock
    has been reduced to zero, report any additional nondividend distribution
    you receive as a capital gain. Whether you report it as a long-term or
    short-term capital gain depends on how long you have held the stock.
    ------------------------------------------------------------------------------------

    So a FIFO allocation is allowed, but a different allocation among lots could also be OK.  As a practical matter it's certainly easiest to simply allocate returns of capital to the earliest lot but that could force you to recognize a profit when it's really not necessary.  If the security is a covered security then your broker has to allocate the dollars in some fashion so it might be helpful to look at that information and see how the broker has done this.  Unfortunately if the allocation is across lots then the only mechanism available to you are a series of "Remove" and "Add" actions to get all those lots squared away.

    Thank you for your response.  I agree with your quotation from the IRS.  This shows exactly why a "Specify Lots" button would be helpful: I can definitely identify the shares subject to the distribution!

    As to the default, it should not be FIFO.  Because ROC payments are usually generated on a per-share basis, the default should probably be to allocate the ROC payment to each lot proportionally to the size (not cost basis) of that lot.  Let the user decide if he wants to use "First Shares In" (in the new Specify Lots window) instead.
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