Nontaxable distributions are reported to you on Form 1099-DIV. They are uncommon. Because they represent a return of your cost, nontaxable distributions (also called nondividend distributions) aren’t taxable.
When figuring the capital gain or loss of stock or mutual fund shares that you sell, you must reduce the cost by the amount of your nontaxable distribution. If you get back all your cost, though, you must report future distributions as capital gains.
Example: A nontaxable distribution of $850 on a $10,000 investment reduces the cost to $9,150.
For more information, see IRS Publication 550: Investment Income and Expenses.