Nearly All of QQQI’s Yield Was Return of Capital, Not Income. Here Is What That Does to Your Cost Basis
QQQI sends monthly cash to investors, but the IRS form filed by the fund tells a very different story about where that money actually comes from and what it quietly does to your cost basis every time a payment hits…
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A Nasdaq-100 income ETF sends monthly cash to retirees, but the IRS form the fund filed reports nearly all of it as return of capital (ROC). The yield investors compare differs from the figure the tax code uses.
NEOS Nasdaq-100 High Income ETF (NASDAQ:QQQI) holds Nasdaq-100 stocks and sells call options on the Nasdaq-100 index to generate its payout. It reported $13.11 billion in net assets as of June 30, 2026. Its latest monthly distribution was $0.6339 per share, with an ex-dividend date of September 16, 2026.
What QQQI’s IRS Filing Calls Your Payout
Funds report cost basis changes on IRS Form 8937. NEOS Investments reported that in the fiscal year ending 05/31/2025, part of every distribution counted as return of capital. Return of capital means a payout the tax code treats as a refund of part of your original investment. NEOS Investments reported $0.58872795 of the $0.62330000 June 2024 payout was return of capital, or roughly 94.45%.
| Payable Dates (FY Ending 5/31/2025) | Return of Capital Share |
|---|---|
| June 2024 through December 2024 | ~94.45% |
| January 2025 through May 2025 | ~98.85% |
Holders keep the cash untaxed when received. The filing states that “the shareholder would reduce the holder’s basis in the stock by the portion of distribution determined to be return of capital” and that “no loss can be recognized by the shareholders of each dividend noted above for the non-taxable return of capital distribution received.”
Four Ways a Shrinking Cost Basis Follows You
- The tax comes later. A lower basis means a larger capital gain when you sell.
- Basis can reach zero. Once return of capital cuts your basis to zero, further distributions are taxed as capital gains.
- Yield comparisons fail. Treasury interest and qualified dividends are taxed when received and don’t affect basis. QQQI’s payout is taxed differently.
- You track the adjustments. Holders should check their 1099-DIV statement, Box 3. Without tracking, you may overpay or underpay tax at sale.
Where You Hold QQQI Decides Whether This Matters
In a taxable account, postponing tax works in your favor. In an IRA, the return of capital label has little effect. Withdrawals follow the account’s tax rules.
A Fair Reading of the ROC Figure
For options income funds, high return of capital often comes from how options gains and losses are classified for tax purposes. That can reflect a tax-efficiency feature. The filing doesn’t necessarily show that the fund is eroding its capital base, nor does it rule that out. When a fund writes options on an index, those contracts receive Section 1256 tax treatment. Under fund distribution-accounting rules, premiums and mark-to-market gains often cannot be characterized as dividend income, so they pass through as ROC. The ROC label simply reflects IRS classification rules, not necessarily poor fund performance.
Lower-Cost Alternatives Holding the Same Stocks
Invesco QQQ Trust (NASDAQ:QQQ) charges 0.18%. Invesco Nasdaq-100 ETF (NASDAQ:QQQM) charges 0.15%. Both capture the index’s full upside but pay small dividends, whereas QQQI’s call-writing strategy sacrifices that upside in exchange for premium income. Another alternative is the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ), which charges about 0.35% and runs an options overlay strategy to generate income. It is important to check how its distributions are taxed.
Who QQQI Suits and Who Should Think Twice
QQQI suits investors who seek monthly cash, hold it in a taxable account, plan to keep it for years, and will track their cost basis carefully. In that account, postponing tax is a real benefit. In an IRA, the return of capital feature adds nothing.
Investors judging it by yield alone may find the fit weaker, as should those who compare its payout to Treasury interest, don’t track basis, or plan to sell soon in a taxable account. The warning signs that a headline yield isn’t what it looks like are the same ones we cataloged in a free dividend trap guide.
If you’re considering a high-payout fund, be sure to read its prospectus and its latest Form 8937. Ask one question: how much of this payout is taxable income, and how much reduces my cost basis?
Contact [email protected] for any questions or corrections.
Ryne Mauck is an investment writer covering exchange-traded funds, retirement planning, and portfolio strategy. Through his work at 24/7 Wall St. and other investment platforms, including Seeking Alpha, he aims to provide clear, research-driven insights that help investors make more informed decisions while maintaining a long-term approach to investing.
Ryne holds a B.Sc. in Finance and an M.A. in Political Science. He is a formerly registered Municipal Advisor Representative and has passed the Series 50, Series 63, and Series 65 exams. His articles are not intended to be, nor should they be interpreted as, financial advice.
