Direct answer
Distributions may be split into Ordinary Dividends (taxed at standard rates), Qualified Dividends/Capital Gains (taxed at lower long-term rates), and Return of Capital (not immediately taxable but lowers cost basis).
Because evergreen funds generate returns through different mechanisms, your distributions may be split into three categories on your tax form:
- Ordinary Dividends: Typically driven by interest income from private credit BDCs or interval funds. These are taxed at your standard income tax rate.
- Qualified Dividends / Capital Gains: Driven by the sale of underlying portfolio companies or real estate assets. These are taxed at lower long-term capital gains rates.
- Return of Capital (ROC): Occasionally, a fund returns a portion of your principal. This is not immediately taxable, but it lowers your cost basis, increasing your potential capital gains when you eventually exit the fund.
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