Is Return of Capital (ROC) Good or Bad?

| At first glance, some investors believe that Return of Capital in ETF dividend payouts is just your money being returned to you. Now, whether that is good or bad is more a factor of timing and, yes, taxes. Let me explain.

This past summer, I started investing in Option Strategy Income ETFs that sell options on reference assets and distribute that income to investors on a weekly or monthly basis. This strategy enables some jaw-dropping yields of 20, 50, and even 100%+ annual dividend yields. But in the ‘fine print’, there is something called Return of Capital. To the uninitiated, this can be a turn off, so let’s clarify what this really is and when it is good and when it is bad.

To learn more, come visit me at:

[embed]BlockStoxx My view of the market, sample trades, and instructional videos and blog articles. Source from my profile on Medium.comblockstoxx.com

Author’s Disclosure and Disclaimer: The author may or may not hold positions mentioned in our blogs. This is not trade or financial advice and I am not a financial advisor, money manager, or tax advisor. This blog represents the opinion of the author and is for entertainment purposes. Also, this blog is in no way a recommendation to buy or sell any security, and past performance is no guarantee of future performance.

What the Heck is ROC?

Return of Capital (ROC) means that, after you buy shares, a portion to up to all of your original capital is returned to you as part of a dividend or distribution. When this happens, it effectively reduces the cost basis, or simply cost, of the shares.

For example, let’s say you bought a computer from Walmart for $1,000. Then, let’s say that Walmart felt generous and decided to return your money, but still let you keep the computer. This effectively reduced the cost of the computer, and when 100% of your money was returned, the computer was basically free and cost basis was reduced to zero.

Likewise, with shares, let’s say you bought 100 shares of an ETF. As part of their strategy to claim a certain dividend yield or market return, it has it in their prospectus that they can pay out distributions with some or all of what you had paid for the shares in the first place — but you can still keep the shares.

This reduces the cost basis, or cost, of the shares, but is not considered capital gain or loss.

That part of the income that is your money being returned to you is not a profit, and therefore, NOT taxed as a capital gain … yet.

Any portion of money NOT designated as ROC, is treated as a taxable capital gain.

There are some newer ETFs coming out that pay out ROC on purpose, such as the ***$XPAY from Roundhill Investments***. Why would they do that?

Source: Roundhill Investments

Well, I see 2 benefits:

1. First, knowing in advance that initial returns will be ROC help with planning.
2. And second, by receiving ROC as the initial payouts, this effectively defers or postpones capital gains, since ROC are not considered profits, just a return of your money.

The risk lies in not being aware of when ROC might occur. For example, if one were to buy this ETF that pays ROC on purpose, there could potentially be little or no profit in the dividend. So, there would be no taxable event either — the dividend might not be taxed because it is a ROC, not a distributed profit from the ETF.

Then, once your cost basis hits zero, you effectively own the shares at $0, and any further gain on shares or in distributions becomes taxable and/or a capital gain that is taxed.

I could see that one could use this knowledge to their advantage, by planning to have no or little initial taxes on the first distributions due to ROC, then knowing that once the cumulative dividend pays for the cost of shares, then I’d expect taxes to kick in after that.

So, to dispel a myth, Return of Capital is not bad, but investors need to be aware of it so that when capital gains DO kick in, they are not surprised by a surge in capital gains taxes.

Thanks for reading!

Ryan @ ***BlockStoxx.com***

Stay tuned for more articles on “What Financial Changes Happen After Retirement?”, “Trading 0 DTE Butterflies Using Trace Hedging Flows”, “Dual Exposure ‘Stacked’ ETFs”, and more!

BlockStoxx Disclaimer

PLEASE DO YOUR OWN RESEARCH. Content on this blog, our website, and all of our social media is of opinion only and for ENTERTAINMENT PURPOSES ONLY and not intended as financial advice or trading advice. For trading, we recommend paper trading. We/I are not financial advisors. Please consult your financial advisor for advice.

All investment strategies and investments involve risk of 100% loss. Do not trade with funds you are not willing to 100% lose. Nothing contained in this website should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.

BlockStoxx LLC is an affiliate marketing company that earns commissions from blog content creation as well as companies that it promotes via social media, blogs, and our website BlockStoxx.com. This blog may contain affiliate links. This means that, at no cost to you, I/we may be compensated if you click through our links. If you do not agree with these terms, please leave this page.