Why are nontaxable distributions reported to the IRS on Form 1099-DIV?
Fidelity is required to report these distributions to you and to the IRS. Nontaxable distributions generally reduce the cost basis of your investment. This becomes important when you sell your investment and need to calculate your gain or loss. However, if the costs basis of your stock has been reduced to zero, you must report subsequent nontaxable distributions as capital gains even though they are reported as nontaxable distributions on Form 1099-DIV.