Say I own a CEF (closed end fund) and at some point the return of capital exceeds the original cost basis of the fund. Pertaining specifically to an IRA account, how does this get handled? Any implications during the subsequent tax years when the costs basis is going into the negative? Any implications when I sell the CEF and receive distributions from the account at retirement age?
Thanks
It does not get handled.
Any implications during the subsequent tax years when the costs basis is going into the negative?
No. Any implications when I sell the CEF
No.
and receive distributions from the account at retirement age?
Yes. Distributions from an IRA get taxed as ordinary income. Take that distribution before attaining age 59 1/2 and the taxable amount is subject to an early withdrawal penalty of 10% unless you meet an exception. Whether or not the distribution is fully taxable will depend upon whether your IRA (not any individual asset in the IRA) has a cost basis. It could only have a cost basis if you made annual contributions you could not deduct or you rolled over after-tax contributions made to a qualified retirement plan and you reported your basis to the IRS on Form 8606 for any tax year you created basis.
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