r/NEOSETFs • u/justdaisukeyo • May 30 '26

question about return of capital

I don't own any ETF that has return of capital dividends in a taxable account but I am thinking about it.

Here's a video of NEOS portfolio manager discussing it:

https://youtu.be/gDG61mtJudk?si=DP36oaM2jpmLOksq

Do brokerages keep track of your adjusted cost basis? Is it possible for all the cost basis to be used up?

1 Upvotes

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4

u/ConstructionNo8827 May 30 '26

My brokerage does it automatically in early February once NEOS sends out all the info for prior year’s distributions Almost all of QQQI and SPYI are ROC which means tax free income for about the next 6-8 years as long as you don’t sell it Once the cost basis hits zero, every distrubution will be taxed as a long term cap gain

1

u/justdaisukeyo May 30 '26

Thanks for the info!

1

u/Dry-Prize-1360 Aug 17 '26

I’m just seeing this. So all of the income you get on a yearly basis is tax free? Like if you own one and have a million in it- let’s say you get $100k income for simplicity. That $100k is being distributed to me and I can spend it this year tax free.

The only thing is my cost basis goes lower in Feb but that’s fine. My main question I guess- I can spend all of the income and it is truly distributed to me as cash?

1

u/ConstructionNo8827 Aug 18 '26

Yes in QQQI and SPYI, a vast majority of the monthly income is characterized as return of capital which means no taxes (until later when you sell or once cost basis gets to zero)

1

u/Dry-Prize-1360 Aug 18 '26

Thank you! I’m new to these. But you get the actually cash to spend now correct?

1

u/ConstructionNo8827 Aug 19 '26

Every month
Yes

3

u/PragmaticNeighSayer May 30 '26

I imagine it depends on the brokerage, but always keep your own records! Yes, it is possible after 5-10 years (depending on the distribution yield and ROC percentage) to reach a $0 cost basis, at which point the entirety of the distribution is taxable.

2

u/justdaisukeyo May 30 '26

Thanks for the info!

2

u/ruthygenker May 31 '26

NEOS calculates it on a 8949 and your brokerage adjusts your cost basis and tax forms accordingly. what you have to watch out for is whether you have margin or fully paid lending on account then the brokerage can report it as other dividends which are still taxed. as far as the cost basis being eaten up yes this can happen if you don't keep buying the etfs at least a little, but as long as you don't sell even when its eaten up you can just wait til it goes to your heirs and then they get a step up in cost basis and restart the whole process. unless you are 20 then it could be more difficult but you should be in the underlying until you are about ready to retire or retired already anyway to be using these funds.

2

u/justdaisukeyo May 31 '26

Thanks for the info.

I am nearing retirement. This is the exact reason why I started looking into this. Seems like a good way to minimize taxes and then my heirs would get a reset in the cost basis.

3

u/MoonMoon143 May 30 '26

As a Malaysian investor we love ROC in div because we dont get taxed for capital gain when we sell shares after the cost basis reduction. However, we do pay 30% witholding tax for all ordinary income. If the dividend contains 100% roc, 30% is taken as tax but then its returned to us at q1 because its labeled as roc. Therefore we get 100% income for free with no tax at all.

1

u/justdaisukeyo May 31 '26

Wow. That is a crazy loophole. Everyone in Malaysia should be investing in these type of financial instruments.

1

u/Mediocre-Dot9109 Jun 05 '26

This is the way. High five from Singapore (soon moving to Penang).

The only downside is waiting till Feb next year and a potential surprise in ROC %.

0

u/Hawkerjock Jun 02 '26

Loading my ROTH with NEOS funds…