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When a Return of Capital (RoC) is entered, gnucash requires a second transaction to account for the gain or loss.

Similar to what happens when you sell a stock, the amount of gain/loss continues to track in various balance sheet style reports as unrealized gains unless the second transaction exists.

For selling a stock, this is clearly capital gain/loss.

But for RoC, it is explicitly not income until the total RoC meets or exceeds the Cost Basis for the stock.

How do I then account for this gain/loss for RoC?

1 Answer 1

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Note: There's a bug open in gnucash Bugzilla (bug 797166) that is very similar to this. It prevents using the account scrub to automate this, so this question uses a manual method.

When a Return of Capital (RoC) on a stock occurs, the amount returned up to the initial cost basis is not considered income. Instead, it goes toward reducing the cost basis of the stock. Thereafter, it is considered income.

I propose this method for entering a RoC transaction in gnucash: create an Equity account (because it's not income) for this purpose. Say for example, Reduction of Cost Basis, being as specific as you like tracking individual stocks. Then when a RoC occurs, you do the usual double transaction like this:

+=================================+====================+==============+==============+===============+
|  Account                        |  Number of Shares  |  Share Price | Buy (debit)  | Sell (credit) |
+=================================+====================+==============+==============+===============+
|  Assets:Stock:SYMBOL            |  0                 |  0           |              | RoC AMOUNT    |   
+---------------------------------+--------------------+--------------+--------------+---------------+
|  Assets:Broker:Cash             |                    |              | RoC AMOUNT   |               |   
+---------------------------------+--------------------+--------------+--------------+---------------+
|                                 |                    |              |              |               |
+---------------------------------+--------------------+--------------+--------------+---------------+
|  Assets:Stock:SYMBOL            |  0                 |  0           | RoC AMOUNT   |               |
+---------------------------------+--------------------+--------------+--------------+---------------+
|  Equity:Reduction of Cost Basis |                    |              |              | RoC AMOUNT    |
+---------------------------------+--------------------+--------------+--------------+---------------+

Then, when the cost basis has been reduced to 0 (again, manually determined), additional RoC are entered like this:

+=================================+====================+==============+==============+===============+
|  Account                        |  Number of Shares  |  Share Price | Buy (debit)  | Sell (credit) |
+=================================+====================+==============+==============+===============+
|  Assets:Stock:SYMBOL            |  0                 |  0           |              | RoC AMOUNT    |   
+---------------------------------+--------------------+--------------+--------------+---------------+
|  Assets:Broker:Cash             |                    |              | RoC AMOUNT   |               |   
+---------------------------------+--------------------+--------------+--------------+---------------+
|                                 |                    |              |              |               |   
+---------------------------------+--------------------+--------------+--------------+---------------+
|  Assets:Stock:SYMBOL            |  0                 |  0           | RoC AMOUNT   |               |   
+---------------------------------+--------------------+--------------+--------------+---------------+
|  Income:Capital gains (LT)      |                    |              |              | RoC AMOUNT    |   
+---------------------------------+--------------------+--------------+--------------+---------------+

This is very similar to accounting for capital gains when a stock is sold. The second transaction is necessary, as otherwise balance sheets and trial balance reports continue to report unrealized gains/losses.

See also this documentation on selling stocks and this somewhat sparse documentation on Return of Capital. Keep in mind that scrubbing the account won't work in this situation, so all of the Cost Basis calculations have to be done manually.

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  • Why create an equity account for this? It isn't equity, it is a decrease to your stock asset account [Cr], and an increase to your cash account [Dr]. This seems overly complicated, as well as just being incorrect from an academic perspective. Dec 19, 2022 at 20:58
  • Well, try it out: if you don't add the second transaction in some form, you have incorrect unrealized gains in all the balance sheet forms. I was wondering if equity was the wrong place to put this. It doesn't belong in income. Where does it go?
    – fbicknel
    Dec 20, 2022 at 3:21
  • Frankly I think double-entry accounting for personal use is entirely a waste of time, and overcomplicating what should be the focus of personal finance [budgeting + long-term financial planning]. And I say that as an accountant. But to answer your question: RoC requires a Dr to cash and Cr to your asset share account. In the unlikely event that RoC wiped out your personal cost base for the share account, it probably constitutes realized income. Direct entries to equity should be limited to [in the case of personal accounting] insertion of assets not previously recorded. Dec 20, 2022 at 14:08

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