A cash liquidation distribution is a distribution of funds back to the investors in a business when that business is liquidated. This distribution represents a return of the residual value of a business to investors. The taxable status of this distribution is as follows:
- The distribution is nontaxable up to the amount of the investor's basis in the stock. Basis is usually the price paid to acquire the stock.
- The distribution is taxable for all amounts exceeding the investor's basis in the stock. This amount is reported as a capital gain for income tax reporting purposes. It may be classified as a long-term or short-term capital gain, depending on the duration of the investor's holding period for the stock.
If the total amount of the distribution is less than the investor's basis in the stock, then report a capital loss instead, but only after the business has cancelled the investor's shares (thereby signifying that no additional payments are forthcoming).
Other characteristics of a cash liquidation distribution are:
- It may be paid in several installments
- The total amount of the dividend is reported to investors by the liquidating company on the Form 1099-DIV
A liquidating distribution is also known as a liquidating dividend.