IOFIX/IOAFX Distributions

BenWP

I received a “section 19a” document from Alpha Centric via Schwab informing shareholders about the percentage of monthly distributions that is income and that which is return of capital. It seems to me this is the first such notice I have received, but I could have missed something previously. In the event, to date, ROC amounts to 56% of the gross distributions with the remainder as true income. I believe the cost basis of one’s holding in the fund must be reduced by the amount of the ROC. I have no idea if what Schwab reports to the IRS accounts for this, nor do I know if TurboTax can account for this. Apparently, upon sale of the MF, if the ROC is not factored in, the shareholder could be in violation of IRS rules. I did not sell when IOAFX cratered, but I did hear on the board of others bailing out. I hope this is post is not too wonky.

davfor

Thanks for the post. That document was in my inbox but I hadn't looked at it yet. Yes, it sounds like it will be necessary to reduce cost basis upon sale. The answers to your two questions will probably present themselves as you complete your tax return if you don't get them answered before then.

My current plan is to continue to hold IOFIX until a few months after a vaccine has become widely distributed. Hopefully, its elevator down and stairway up journey will be substantially complete by then. IOFIX popped up 2.06% yesterday....

msf

Here are a couple of earlier Section 19a docs for the fund: March and April. There may be others.

As @Vegomatic posted in another thread, sometimes these interim classifications of distributions change before getting to the official 1099-DIV.

That said, I noticed that 97% of IOFIX's securities are floating rate. Years ago, I owned a fund that invested in agency ARMs. Almost a quarter of the distributions I received that year was ROC. There may be something inherent in these securities that creates ROC. Just an observation, I'm not digging into it.

The ROC shows up on your 1099-DIV in Box 3 (nondividend distributions). This is pretty basic, and not uncommon for closed end fund with managed distributions. So all tax software should handle it.

There is a quirk with ROC. As noted, this reduces your cost basis. If your cost basis drops to zero, any additional ROC is treated as capital gains.
https://www.irs.gov/taxtopics/tc404

If your shares are "covered" Schwab is required to keep track of your cost basis. I believe that it is required to incorporate the effect of return of capital when reporting your cost basis (i.e. it should track this correctly). However, the ultimate responsibility for keeping track is yours, regardless of what Schwab reports.

davfor

A little internet poking turned this up this comment from turbotax.....

Thanks to a law passed in 2008, taxpayers receive help keeping track of their tax basis. The law requires brokers to track the basis of specified securities (including stocks and mutual fund shares) purchased in 2011 and later years, and report the basis amounts to investors (and the IRS) when the securities are sold. Congress didn’t impose this requirement just to be nice; the lawmakers hope that basis reporting will lead to more profit being reported and more taxes being collected. As stated, however, the new basis reporting rules which are phased-in over three years only apply to specified securities that are acquired in 2011 and beyond.

https://turbotax.intuit.com/tax-tips/rental-property/cost-basis-tracking-your-tax-basis/L4i1f9qB1

msf

That's true. The law strictly concerns information that the brokerage is required to provide the IRS. It is there to make it easier for the IRS to identify filers who misrepresent their costs. It is not there to relieve taxpayers of the responsibility of maintaining their own records and reporting accurately.

For example, you might sell a fund in one account at a loss, and purchase it back in another account within 30 days at the same brokerage. That's a wash sale, and you're supposed to defer the loss.

But the IRS has a rule explicitly requiring the brokerage to ignore the wash sale when reporting cost basis. It's up to you to report the correct adjusted cost, with explanation, on your tax return. (Yes, I've already had to do this.)

davfor

H & R Block included an input line item in its personal tax software program this year that permits it to utilize the total "wash sale loss disallowed" amount from the 1099 form to make the needed wash sale adjustment. I suspect turbotax may also have this feature?

msf

I just used wash sales as a concrete example of where the cost basis that the brokerage reports to the IRS is not correct - to illustrate that the ultimate responsibility for getting this right is the taxpayer's.

If the sale and repurchase of the security were done in the same account, the brokerage will correctly report the wash sale in box 1g of the 1099-B. But if the wash sale involved two different accounts, especially across different brokerages, the 1099-B won't show the wash sale. You'll have to identify that yourself.

As to what TT does, its dialog (interview) does enable you to make adjustments to the cost basis. That dialog asks you how many shares you repurchased (and when). If, for example, you had a $100 loss on the sale of 1000 shares but then repurchased 400 shares within the 30 day window, it correctly reports a wash sale adjustment of $40 and an allowed loss of $60.

BenWP

Thanks @msf for the info you posted on reporting ROC. My IOFAX shares are "covered," although I haven't sold and won't have to worry about the basis unless I do. Reporting a wash sale as you illustrate reminds me that rigorous honesty is required. Each year I have to answer the question on my MI state income tax return as to whether I bought anything online for which tax was not paid. I'm not telling on myself for now.

Old_Joe

"rigorous honesty is required"

@BenWP- Are you sure about that? I've checked with our chief executive officer and he just laughed and said it was the first that he'd heard of anything like that.

FD1000

IOFIX short term fee of 1% within 180 days was canceled.