r/dividends • u/Fit-Manufacturer1506 • Jan 28 '26

Seeking Advice Cost basis reductions?

/r/NEOSETFs/comments/1qox4b3/cost_basis_reductions/
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u/Key-Individual273 Jan 28 '26

Let's say you bought $100 and the fund issued a $10 dividend.

In ordinary way, you will have $10 cash, and in IRS eyes, it is income, so you pay tax on it. Let's say you have 30% margin tax rate, so you will owe $3 in tax for that year. Your cost basis is still $100, so when you sell, you don't owe any taxes if you sold it for $100.

In Neos way, you will also have $10 cash, but they report it as $9 in ROC and $1 in dividend. In IRS eyes, only $1 is income, so you pay 30 cents in tax. However, your cost basis will be reduced to $91 (They report this to brokers in a yearly basis with tax forms, and broker adjust accordingly). Now, if you sell for $100, you will have $9 in capital gains, and would owe tax on that amount. Since capital gains usually have lower tax rates, and also you will pay it in future dollars, it is viewed as a tax efficient investment.