Non-Dividend Distributions

The use of Exchange Traded Funds ("ETFs") that make non-dividend distributions ("NDDs") inside a mark to market ("MTM") account somewhat runs contrary to the purpose of a Trader in Securities ("TIS").

It is an arguable position, but the purpose of NDDs, especially ones that focus on a covered call strategy within the ETF, is more suited to investments to generate income and retirement accounts rather than capturing profit in response to short-term movements in the market.

Distributions from ETFs may have multiple components, consisting of net investment income, net realized capital gains and return of capital:

Distribution Component	Taxation
Net investment income	Ordinary income (Sch B)
Net realized capital gains	Capital gains (Sch D)
Return of capital	No tax - reduction of basis

These must be separated on your tax return into their respective income categories and the basis in the ETF adjusted. The exact amounts may be downloaded from the website of the ETF and determined using the Rule 19a-1 Notice and the detail attached to Form 8937.

Distributions may be annual, quarterly or monthly. An annual distribution would not be as difficult to separate the income and basis components but monthly distributions are very difficult, especially if you are "trading" the ETF and you happen to own shares on the date of record.

Further, and most importantly, if the ETF is held at year-end, it must be marked to market based on the adjusted basis of the ETF on the last business day of the year.

There is more information, examples and a template about non-dividend distributions on this website.