A corporation that buys back its own shares reports the payment on Form 1099-B when the buyback qualifies as a sale under Internal Revenue Code Section 302, and on Form 1099-DIV when it fails every Section 302 test and defaults to a dividend distribution. That single classification decision drives everything else in stock redemption 1099 reporting: which boxes get filled, what the shareholder owes, and whether basis shelters any of the payment. Closely held corporations get this wrong regularly, usually because the attribution rules pull in shares held by family members that no one thought to count.
Why the Form Choice Changes the Tax Bill
Sale treatment lets the shareholder subtract cost basis from the proceeds and pay tax only on the gain. Pay $50,000 for stock, get $200,000 in the redemption, and you report $150,000 of capital gain. If the stock was held longer than a year, that gain qualifies for long-term capital gains rates.1Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
Dividend treatment is harsher. The entire payment, up to the corporation’s earnings and profits, is taxable income. Basis provides no offset. Using the same numbers, the shareholder could owe tax on the full $200,000 rather than the $150,000 gain. Qualified dividends and long-term capital gains carry the same preferential rate, so the rate may not shift, but the taxable amount is much larger. Non-qualified dividends are taxed at ordinary income rates, which top out at 37%.
Sending the wrong form doesn’t just create a paperwork problem. The shareholder files based on what they received, and an incorrect form leads to the wrong tax paid, IRS matching notices, and penalties on the corporation.
The Section 302 Tests That Decide Sale Treatment
Section 302 sets four tests. Pass any one and the redemption is a sale, reported on Form 1099-B. Fail all four and the payment is a distribution under Section 301, taxable as a dividend to the extent of earnings and profits, reported on Form 1099-DIV.2Office of the Law Revision Counsel. 26 USC 302 – Distributions in Redemption of Stock
Substantially Disproportionate Redemption
This is the most mechanical test, under Section 302(b)(2). After the redemption, the shareholder’s percentage of voting stock must be less than 80% of what it was before, and the shareholder must own less than 50% of total voting power. The same 80% reduction requirement applies to common stock ownership, voting or nonvoting. If the redemption is part of a plan of multiple distributions that collectively aren’t substantially disproportionate, the test fails even if the single redemption looks fine on paper.
Complete Termination
Under Section 302(b)(3), the shareholder surrenders every share and holds none, directly or by attribution, after the redemption. Remaining as a creditor of the corporation is fine; keeping any equity interest is not.
Not Essentially Equivalent to a Dividend
Section 302(b)(1) requires a “meaningful reduction” in the shareholder’s proportionate interest. No bright-line percentage applies; courts decide on facts and circumstances. This is the fallback when the more precise tests don’t fit, and it carries real uncertainty.
Partial Liquidation
Section 302(b)(4) applies only to non-corporate shareholders. It covers distributions tied to the corporation ceasing a qualified trade or business and distributing that business’s assets on a non-pro-rata basis.
The Attribution Trap
The Section 302 tests count more than the stock in the shareholder’s own name. Under Section 318, a shareholder constructively owns stock held by a spouse, children, grandchildren, and parents, plus stock held through partnerships, estates, trusts, and 50%-or-more-owned corporations.3Office of the Law Revision Counsel. 26 USC 318 – Constructive Ownership of Stock Stock options count as shares already owned.
Most closely held redemptions stumble here. A parent redeems every share they hold, but the children still own stock in the company. That means the parent constructively still owns shares. The redemption isn’t a complete termination, and the substantially disproportionate test may fail because the parent’s post-redemption ownership, with the children’s shares added, hasn’t dropped 20%.
Section 302(c)(2) offers a safety valve for the complete termination test. The shareholder can waive family attribution if they meet three conditions: no post-redemption interest in the corporation other than as a creditor (no officer, director, or employee role), no acquisition of any such interest for ten years, and a signed agreement filed with the IRS to notify it if they do. Taking any role at the company inside the ten-year window can retroactively unwind the sale treatment.
Filling Out the 1099-B for a Sale
When the redemption qualifies as a sale, gross proceeds (cash plus the fair market value of any property delivered to the shareholder) go in Box 1d of Form 1099-B.4Internal Revenue Service. About Form 1099-B, Proceeds from Broker and Barter Exchange Transactions Box 1c gets the redemption date, which sets short-term or long-term treatment. If the stock is a covered security and the corporation is acting as a broker, cost basis goes in Box 1e; for noncovered securities the basis box may be left blank and the shareholder tracks it from their own records.5Internal Revenue Service. Instructions for Form 1099-B
Issue a separate Form 1099-B for each class of stock redeemed. The shareholder carries the information onto Form 8949 and Schedule D, subtracts basis, and reports the gain or loss.6Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
Filling Out the 1099-DIV for a Dividend
When the redemption fails every Section 302 test, the full payment becomes a Section 301 distribution and gets sliced into three tiers based on the corporation’s current and accumulated earnings and profits (E&P):7Office of the Law Revision Counsel. 26 USC 301 – Distributions of Property
- The portion covered by E&P is a taxable dividend, reported in Box 1a as total ordinary dividends. The qualified-dividend portion (if the holding-period requirements are met) also goes in Box 1b.
- Any amount above E&P is a nontaxable return of capital, reported in Box 3 as nondividend distributions, and it reduces the shareholder’s basis in remaining shares dollar for dollar.
- Once basis is exhausted, any further amount is treated as capital gain from a deemed sale.
The shareholder cannot use basis to offset the dividend portion. The full amount up to E&P is taxable regardless of what they paid for the stock.
What Happens to Basis
Under sale treatment, basis works normally. Subtract it from the proceeds and it’s gone.
Under dividend treatment, basis isn’t lost, but it doesn’t offset the distribution either. It shifts to the shareholder’s remaining shares. If the shareholder was fully redeemed but the redemption still failed Section 302 because of constructive ownership, the basis moves to the related party whose shares caused the failure. A parent whose redemption fails because of stock attributed from a child has that basis added to the child’s basis. This rule is easy to miss and often gets missed.
Foreign Shareholders Use Different Forms
If the shareholder is a nonresident alien or foreign corporation, neither 1099 form applies. The withholding agent reports the payment on Form 1042-S, and the corporation files annual Form 1042 to reconcile amounts withheld.8Internal Revenue Service. About Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding The default withholding rate on U.S.-source income to foreign persons is 30%, often reduced by treaty for dividends.9Internal Revenue Service. Publication 515 (2026), Withholding of Tax on Nonresident Aliens and Foreign Entities The sale-vs-dividend classification still matters, because it drives which withholding provisions and treaty articles apply. FIRPTA layers on additional rules for U.S. real property holding corporations.
When a Related Corporation Buys the Stock
Section 304 catches transactions dressed up as ordinary sales. If the same person controls two corporations and sells stock of one to the other, Section 304 recharacterizes the payment as a redemption and runs it back through the Section 302 tests.10Office of the Law Revision Counsel. 26 USC 304 – Redemption Through Use of Related Corporations Fail those tests and the payment is a dividend out of the acquiring corporation’s E&P first, then the issuing corporation’s E&P. Control means at least 50% of voting power or 50% of the value of all stock classes. The 1099 reporting follows the same logic: 1099-B if the deemed redemption passes a Section 302 test, 1099-DIV if it fails.
Deadlines and the E-Filing Threshold
The corporation furnishes the 1099 to the shareholder by January 31. Brokers get until February 15 to furnish Form 1099-B.5Internal Revenue Service. Instructions for Form 1099-B Paper filings to the IRS are due February 28 with Form 1096 as the transmittal; electronic filings are due March 31 and skip the 1096.11Internal Revenue Service. About Form 1096, Annual Summary and Transmittal of U.S. Information Returns
Most filers no longer have the paper option. As of January 1, 2024, any filer issuing 10 or more information returns of any type in the year must file electronically. The threshold aggregates across return types: five 1099-Bs, three 1099-DIVs, and two W-2s hit the 10-return limit, and everything must go electronic.12Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
Penalties for the Wrong Form or Late Filing
Section 6721 penalizes failures in filing with the IRS, and Section 6722 mirrors it for failures in furnishing statements to the shareholder. For returns due in 2026, both carry the same tiered amounts:13Internal Revenue Service. Revenue Procedure 2024-40
- Corrected within 30 days: $60 per return, up to $683,000 per year.
- Corrected after 30 days but by August 1: $130 per return, up to $2,049,000 per year.
- Not corrected by August 1: $340 per return, up to $4,098,500 per year.
Smaller filers with average gross receipts of $5 million or less over the prior three years face lower annual caps: $239,000, $683,000, and $1,366,000 across the same three tiers. Intentional disregard raises the penalty to at least $500 per return with no annual cap. For broker returns filed under Section 6045(a), which includes 1099-B filings, intentional disregard is the greater of $500 or 5% of the amount required to be reported.14Office of the Law Revision Counsel. 26 USC 6721 – Failure to File Correct Information Returns15Office of the Law Revision Counsel. 26 USC 6722 – Failure to Furnish Correct Payee Statements
Penalties apply per return, so a corporation that misclassifies redemptions for multiple shareholders sees the total climb fast.
Fixing a Wrong Form
Sending a 1099-DIV when it should have been a 1099-B (or the reverse) is an “Error Type 2” correction, which the IRS uses specifically for wrong-form-type filings. The fix takes two filings:16Internal Revenue Service. General Instructions for Certain Information Returns (2025)
- Zero out the incorrect return. Prepare a new copy of the originally filed form, check the “CORRECTED” box, enter the same payer and recipient information, and put zero in every money box.
- File the correct return. Prepare the right form with accurate figures. Do not check the “CORRECTED” box; treat it as a new original.
Both go to the IRS with a fresh Form 1096 marked “Filed To Correct Return” in the bottom margin, and updated copies go to the shareholder. Speed matters because of the penalty tiers: fixing inside 30 days costs $60 per return; waiting past August 1 costs $340.
If you’re the shareholder and can’t get the corporation to issue a corrected form, report the transaction correctly on your own return and attach an explanation. The IRS matching program will likely flag it, but an accurate filing with documentation is the best position to be in while the correction moves through.