For the 2024 tax year, roughly 94% of the NEOS S&P 500 High Income ETF’s distributions were classified as return of capital, meaning shareholders owed no federal income tax on that cash in the year they received it. The remaining 6% or so was ordinary dividends. That composition is the core of SPYI’s tax treatment: most of the monthly income is deferred rather than taxed on receipt, but the deferred bill arrives when you sell your shares because return of capital reduces your cost basis.
SPYI’s total 2024 distribution was $6.1182 per share, split about 93.91% return of capital and 6.09% ordinary dividends, with no long-term capital gains component.1NEOS Investments. A Look at SPYI’s 2024 Distribution Classifications The December 2025 Section 19(a) notice showed a similar pattern, with cumulative return of capital around 95% and net investment income near 5%.2NEOS Investments. SPYI 19a-1 Notice December 2025 Each category hits your return differently, so the split is the starting point for figuring out what you actually owe.
Return of Capital and Your Cost Basis
Return of capital isn’t a profit. The IRS treats it as the fund handing back a piece of your original investment, so no tax is owed in the year of the distribution.3Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions For a fund paying roughly 12% in annual distributions with most of it classified this way, the near-term tax savings are real.
The tradeoff is a mandatory reduction to your cost basis. Buy SPYI at $50, receive $3 in return of capital over a year, and your adjusted basis drops to $47. The IRS hasn’t forgiven that $3; it has deferred it. When you sell, your taxable gain runs from the lower basis, producing a larger capital gain at the time of sale.4Internal Revenue Service. Mutual Funds (Costs, Distributions, Etc.)
Two things make the deferral valuable rather than a timing trick. Money you would have paid in tax stays invested and compounds for however long you hold. And if you hold the shares more than a year before selling, the eventual gain qualifies for long-term capital gains rates, which top out at 20% rather than ordinary income rates.
If your cost basis ever reaches zero from accumulated return of capital, any further return of capital distributions are immediately taxable as capital gains.3Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions Most investors sell or rebalance before this point, but the rule matters if you plan to hold for many years.
The 60/40 Rule on the Fund’s Options
SPYI’s options strategy uses SPX index options, which the fund identifies as Section 1256 contracts.5NEOS Investments. SPYI – NEOS S&P 500 High Income ETF Under federal tax law, gains and losses on Section 1256 contracts are automatically split into 60% long-term and 40% short-term, regardless of how long the fund actually held the position. SPX options qualify because they are nonequity options, meaning options on a broad-based index rather than on individual stocks or a narrow index.6Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
The 60% long-term portion is taxed at a maximum of 20%, while only the 40% short-term portion faces ordinary income rates. That produces a blended maximum rate well below what pure short-term trading gains would trigger.
Section 1256 contracts also get mark-to-market treatment at year end. Contracts the fund still holds on the last business day of the tax year are treated as sold at fair market value that day, and the resulting gain or loss is recognized for that year.7Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles The fund handles this accounting; the shareholder-level effect is that it contributes to how distributions get characterized on your tax forms.
You may wonder where the 60/40 benefit shows up on your own return when nearly all of SPYI’s distributions come through as return of capital. It largely doesn’t, directly. The favorable options treatment combined with the fund’s tax-loss harvesting keeps its taxable income low, which is what allows so much of the distribution to be classified as return of capital in the first place.
Wash Sales on Your SPYI Shares
The fund’s Section 1256 contracts are exempt from the wash sale rule by statute.6Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market Your SPYI shares are not.
If you sell SPYI at a loss and repurchase shares within 30 calendar days on either side of the sale, the wash sale rule disallows that loss on your return. The disallowed loss is added to the cost basis of the replacement shares, deferring but not eliminating the benefit. The 30-day window applies across all your accounts, including IRAs and a spouse’s accounts. This matters most for investors trading around SPYI positions or harvesting losses near year end.
The 3.8% Net Investment Income Tax
Higher-income investors face an extra layer. The net investment income tax adds 3.8% on top of whatever rate applies to your investment gains, including capital gains and dividends from funds like SPYI. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the applicable threshold.8Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
The thresholds are $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. These amounts are fixed in the statute and aren’t adjusted for inflation, so more investors cross them each year.8Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
Return of capital distributions don’t count as net investment income in the year received, another advantage of SPYI’s structure. When you eventually sell and recognize the capital gain from the reduced basis, though, that gain does count. A large SPYI position sold all at once could push you over the threshold in that tax year even if your regular income normally sits below it. Spreading sales across years can help manage this.
Qualified Dividends on the Ordinary Slice
The small ordinary dividend portion may include qualified dividends, which are taxed at the lower capital gains rates of 0%, 15%, or 20% depending on income. To get that treatment, you need to have held the SPYI shares at least 61 days during the 121-day period starting 60 days before the fund’s ex-dividend date. The holding period counts the day you sold but not the day you bought.
Because qualified dividends are a small fraction of SPYI’s total distributions, the holding period matters less here than for a traditional dividend fund. Most investors holding SPYI for monthly income will clear the 61-day test easily.
Why Holding SPYI in an IRA Wastes the Tax Structure
Everything above applies to taxable brokerage accounts. Inside a traditional IRA, 401(k), or other tax-deferred account, none of it matters during accumulation. Distributions aren’t taxed when received regardless of classification, and all withdrawals are eventually taxed as ordinary income. The return of capital treatment, the 60/40 rule, and the basis adjustments are overridden by the IRA wrapper.
In a Roth IRA, qualified withdrawals are entirely tax-free, so the classification again makes no practical difference.
SPYI’s primary appeal over competitors like JEPI or JEPQ is its favorable tax structure. Holding it exclusively in an IRA means paying for tax optimization you can’t use. Income-focused ETFs that trade tax efficiency for higher raw yield may be worth comparing in that context.
Forms You Will Receive and What to File
Your brokerage sends Form 1099-DIV after year end, reporting all SPYI distributions.9Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions The boxes that matter are 1a (total ordinary dividends), 1b (qualified dividends), and 3 (nondividend distributions, which is your return of capital). For most SPYI holders, Box 3 is the largest number by a wide margin.
Throughout the year, the fund issues Section 19(a) notices with each distribution, giving an estimated breakdown of the payment’s sources. These help you track your adjusted basis before the 1099-DIV arrives, but they aren’t binding. The final year-end classification can differ from the monthly estimates.
Ordinary dividends from Box 1a get reported as income. If you sold shares during the year, the gain or loss goes on Schedule D with transaction detail on Form 8949.10Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets Section 1256 contract gains that flow through on your brokerage statement go on Form 6781, with the 60/40 split carried to Schedule D.11Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
Return of capital from Box 3 doesn’t appear as income on your Form 1040. You subtract it from your cost basis in the shares. Most brokerages track this automatically, but verifying the adjusted basis yourself is worth doing, especially after several years of distributions when the cumulative reduction becomes significant. Your brokerage should report the adjusted basis on Form 1099-B when you sell, but errors happen, and the IRS holds you responsible for the correct figure.4Internal Revenue Service. Mutual Funds (Costs, Distributions, Etc.)
If you use tax software, most 1099-DIV data imports directly. Double-check your running basis manually if you’ve transferred shares between brokerages or hold the position across multiple accounts. A mismatch between your brokerage’s reported basis and the figure the IRS expects is the kind of small discrepancy that triggers correspondence audits.