Income distributions paid by certain investments may need to be reclassified to a different category after the issuer publishes year-end tax information. This annual dividend income reclassification process usually occurs between January and late March for dividends attributable to the previous tax year.
Initially, distributions are classified for tax purposes as an ordinary dividend. Because the income classification for some securities is not known by the issuer when paid, some investments are prone to reclassification. These distributions can only be determined after year-end without prior knowledge of US financial institutions. Since firms may not receive this information until after tax forms publish, it may be necessary to update tax forms and year-end reports.
What to Expect When Your Dividend Income Reclassifies
When an investment reclassifies income after the initial publication of year-end tax forms and statements, we may be required to publish corrected tax forms to you. If you owned investments, specifically mutual funds, subject to multiple reclassifications, then you may receive multiple corrected tax forms. IBKR, however, will send you notification of the tax form correction.
Any adjustment to both the classification of distributions and tax withholding will reflect on your activity statement, tax forms, and year end reports. The final tax classification of each distribution is shown in the annual Dividend Report. The Dividend Report shows account details for all dividends, payment in lieu of dividends, and related tax withholding. In addition, withholding adjustments are reflected on the Daily and YTD activity statements.
Cost Basis Adjustments
U.S. Taxpayers
Any income reclassifications affecting U.S. taxpayers, such as return of capital, which change the cost basis may result in a corrected Form 1099-B. A return of capital distribution is a non-taxable distribution that reduces the original principal investment.
- Covered Securities: Securities subject to cost basis reporting on Form 1099-B are subject to a cost basis adjustment on the tax form and may require a wash sale adjustment.
- Non-covered Securities: Cost basis is not reported to the IRS and does not result in a corrected Form 1099-B. Adjustments to cost basis, however, will be reflected on the Form 8949 Worksheet even though it is not filed with the IRS. Consult your tax advisor for more information.
Non U.S. Taxpayers
While cost basis adjustments of U.S. source income due to a reclassification are not reflected in the 1042-S, the basis adjustment is reflected in the cost basis on the activity statement. Any return of capital distribution that reduces your cost basis will be reflected in the 1042-S reporting with the income code 37.
Please Note:
- Organizational changes, also called corporate actions, which include income distributions may reclassify income and affect cost basis. For more information on the consequences, check with the issuer and a qualified tax professional.
Late Adjustments
Companies may provide updated income information affecting your tax forms after the tax filing due date. When this happens, IBKR sends notification through the secure message center and provides updated tax forms.
Frequently Reclassified Investments
The income tax classification of certain securities is more likely to occur at year-end. The most common securities subject to reclassification are pass-through investments whose income passes through directly to investors, such as Regulated Investment Companies (RICs) and Real Estate Investment Companies (REITs). Other investments prone to reclassify income include:
- Real Estate Investment Trusts (REITs)
- Unit Investment Trusts (UITs)
- Regulated Investment Companies (RICs)
- Widely Held Fixed Income Trusts (WHFITs)
- Mutual Funds & Exchange Traded Funds (ETFs)
- Corporate Stock
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.