capital dividend

capital dividend

A dividend considered to be drawn from paid-in capital rather than from current earnings or retained earnings. Capital dividends are generally not taxable to a stockholder when paid; rather, they are used to adjust the basis of the security downward such that a larger capital gain or a smaller capital loss will result at the time the security is sold. A capital dividend is somewhat akin to tearing boards off a house to use as firewood. If the process goes on too long, the house itself will be gone. Also called return of capital.