QQQI Tax Treatment: 60/40 Rule, Return of Capital, and 1099-DIV

QQQI’s tax treatment splits across three buckets, and the rate on any given dollar depends on which bucket it lands in. The fund sells Nasdaq-100 index options that qualify as Section 1256 contracts, collects dividends from the underlying stocks, and often returns some of your invested capital. Each stream carries its own tax rules, and the mix shifts year to year with the fund’s trading and market conditions.¹

One practical note before the details: the monthly 19a-1 notices NEOS publishes classify distributions on a preliminary basis, and the final tax character only shows up on the year-end Form 1099-DIV. Don’t build a tax plan around the monthly estimates. Wait for the 1099.¹

The 60/40 Rule on the Fund’s Index Options

QQQI writes NDX options specifically because they qualify as Section 1256 contracts. Under IRC Section 1256, 60% of the gain is taxed at long-term capital gains rates and 40% at short-term rates, no matter how long the fund actually held the position. An option held three days gets the same 60/40 split as one held three months. Individual stock options don’t qualify; only nonequity options, which include options on broad-based indexes like the Nasdaq-100, fall under Section 1256.²

For 2026, long-term capital gains rates are 0%, 15%, or 20% depending on taxable income, and short-term gains are taxed at your ordinary rate, which tops out at 37%.³⁴ If you’re in the top bracket, the blended federal rate on Section 1256 gains works out to roughly 26.8% rather than 37%. That gap is the tax advantage QQQI leans on relative to funds that produce pure ordinary income.

You don’t file Form 6781 yourself for these gains. That form is for taxpayers who directly hold Section 1256 contracts. The fund handles the 60/40 characterization internally and passes the tax character through to you on the 1099-DIV.⁵

Return of Capital and Your Cost Basis

A large share of QQQI’s monthly cash often gets classified as return of capital, which happens when the fund distributes more than its current earnings and profits. Return of capital is not taxable in the year you receive it. The IRS treats it as getting your own money back.⁶

The catch: every dollar reduces your cost basis. Buy shares at $50, collect $3 per share in return of capital over time, and your adjusted basis drops to $47. When you sell, you owe capital gains tax on a larger gain because your basis is lower. Once basis reaches zero, any further return of capital distributions are immediately taxable as capital gains.⁶

This is where long-term holders get surprised. The monthly cash feels like free income, and the 1099 might show a modest taxable amount. The tax hasn’t been avoided, only deferred. Investors who reinvest for years can end up with a very low basis and a large taxable gain when they finally sell.

Qualified and Ordinary Dividends

QQQI also passes through dividends from the Nasdaq-100 stocks it holds. Qualified dividends are taxed at the same 0%, 15%, or 20% rates as long-term capital gains. To qualify, the fund must hold the dividend-paying stock at least 61 days during the 121-day window that begins 60 days before the ex-dividend date.⁷ Dividends from stocks the fund didn’t hold long enough are ordinary dividends, taxed at your regular income rate.⁴

Because QQQI actively trades the underlying portfolio to support its options strategy, the qualified share can shift from year to year. Equity dividends also tend to be a smaller slice of the total distribution compared with option premium and return of capital. Still, the qualified portion pulls down the blended rate on your overall payout, so it’s worth reading on your 1099.

The 3.8% Net Investment Income Tax

Higher earners face an extra 3.8% surtax on investment income, and every category of QQQI income can be subject to it. The Net Investment Income Tax applies when modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married filing jointly, or $125,000 for married filing separately.⁸ These thresholds are not indexed for inflation, so they’ve caught more taxpayers each year since 2013.

The tax applies to the lesser of your net investment income or the amount your modified AGI exceeds the threshold.⁹ Section 1256 gains, qualified dividends, ordinary dividends, and gains from selling QQQI shares all count. For someone in the top bracket, the federal rate on ordinary dividends reaches 40.8% (37% plus 3.8%), and even the favorable long-term rate becomes 23.8%.

What Shows Up on Your 1099-DIV

NEOS reports all QQQI distributions on Form 1099-DIV, delivered through your brokerage’s year-end tax package.¹ The boxes that matter:

Box 1a, total ordinary dividends: includes short-term capital gains passed through by the fund and any dividends that didn’t meet the qualified holding period.¹⁰
Box 1b, qualified dividends: the portion of 1a taxed at long-term capital gains rates.
Box 2a, total capital gain distributions: long-term gains, including the long-term portion of Section 1256 gains under the 60/40 rule.
Box 3, nondividend distributions: return of capital, which reduces basis instead of appearing as taxable income.¹⁰

Your brokerage’s supplemental tax statement usually maps these amounts to the specific lines on Schedule B and Schedule D.

Holding QQQI in an IRA or Roth

Inside a traditional IRA or 401(k), none of the distribution categories matter while the money stays in the account. Dividends, option gains, and return of capital all grow tax-deferred, and you pay ordinary income tax on withdrawals no matter how the income was originally characterized. In a Roth IRA, qualified withdrawals are entirely tax-free.

The tradeoff is real. A Roth eliminates the tax drag entirely, which is attractive given how much ordinary income and short-term character QQQI can generate. A traditional IRA, though, converts what would have been favorably taxed long-term gains and qualified dividends into ordinary income at withdrawal. For investors in higher brackets, the 60/40 advantage plus qualified dividend rates available in a taxable account may produce a better after-tax result than a traditional IRA. Run the numbers before assuming the retirement account wins.

State Taxes on QQQI Income

Federal treatment is only part of the picture. Most states tax investment income at their regular income tax rates, which range from zero to above 13%. Many states do not offer a reduced rate for long-term capital gains or qualified dividends, so at the state level a Section 1256 gain, a qualified dividend, and an ordinary dividend can all face the same rate.

Return of capital keeps its tax-deferred character at the state level too, reducing basis the same way it does federally. The gain shows up when you sell, taxed under your state’s rules at that time. In high-tax states, the combined federal and state burden can make QQQI’s advertised distribution rate look quite different on an after-tax basis.

1
NEOS Investments. QQQI – Nasdaq-100 High Income ETF
2
Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market
3
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
6
Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions
7
Legal Information Institute. 26 USC 1(h)(11) – Dividends Taxed as Net Capital Gain
8
Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax
9
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
10
Internal Revenue Service. Instructions for Form 1099-DIV