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.
You must reduce your basis 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. If a total of $10,400 nontaxable distributions are received, $400 (once basis was exceeded) is taxable as a capital gain.
For more information, see IRS Publication 550: Investment Income and Expenses.