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Five covered-call funds, one calendar year, five different tax characters for the payout. The instrument inside the fund decides the character at the fund level, but what lands on your 1099 depends on the fund’s earnings for the year, and that is only known after the year ends.
What the monthly notice says versus what the year says
Each payout comes with a notice estimating its character, required by securities law, and the notice says in its own words that it is an estimate “not being provided for tax reporting purposes.” In November 2024 one fund’s notice showed 99.49% return of capital. Its sponsor’s year-end supplement for calendar 2025, summed across twelve payouts, showed 74% ordinary income, 13% long-term gain, and 13% return of capital. January’s payout was entirely long-term gain; November’s and December’s were entirely ordinary income.
For a California investor at the top rate the difference between “99% return of capital” and “74% ordinary” is the difference between a tax rate of about zero this year and 52%.
Why the character moves
A fund’s payout is a dividend only up to its earnings and profits for the year. Option-income funds pay a fixed monthly target, recognize their index-option gains at year-end under the mark-to-market rule, and can offset gains with harvested losses. So the earnings figure, and with it the split among the three buckets, is not known until the books close, and the sponsors’ fiscal years differ: one runs to May 31, another to December 31, another to October 31.
Where the real number lives
Form 8937, filed with the IRS after the fiscal year, states the return-of-capital share of each payout and instructs shareholders to reduce basis accordingly. Sponsors post it on their sites. It is a PDF, filed months after the payouts, and building the chart above meant reading three sponsors’ filings by hand. No brokerage statement does this for you during the year.