Tax reporting for homegrown dividends - tracking principle reduction

This is a great question about a tax-efficient withdrawal strategy that doesn't get enough attention. You're right that withdrawing your original principal is tax-free - it's essentially just taking back money you already paid taxes on. The good news is that there's no special schedule or form needed for tracking these withdrawals. The IRS doesn't require you to report when you withdraw your original investment principal. However, for your own records, you absolutely should track your cost basis (your original investment amount) and your withdrawals from principal. Keep in mind that if you're selling investments to generate these "homegrown dividends," you'll need to be strategic about which lots you're selling to ensure you're only selling shares that won't result in capital gains. Most brokerages allow specific lot identification when selling. The most important thing is to maintain detailed records of your original investments and subsequent withdrawals. This documentation becomes crucial if you're ever audited, as you'll need to prove that the money withdrawn was indeed from principal and not gains.

I tried manually tracking all my investment basis and withdrawals for years and it was a nightmare until I found taxr.ai (https://taxr.ai). Their system can analyze all your brokerage statements and automatically identify which portions of your withdrawals are principal vs. gains. I was in a similar situation with my retirement accounts where I had made both pre-tax and after-tax contributions over the years, and I needed to know exactly how much I could withdraw without triggering additional taxes. Their tax document analyzer saved me hours of spreadsheet work and probably prevented me from making some costly mistakes with my "homegrown dividends" approach.

Just wanted to follow up and say I tried taxr.ai after seeing it mentioned here. It actually worked really well for my situation. I uploaded my last 5 years of statements and it correctly identified which portions of my withdrawals were return of principal vs. taxable gains. Saved me from accidentally over-reporting my investment income. It even caught some wash sales I wasn't aware of that happened between my different accounts. Now I have a clear record of exactly how much principal I've withdrawn and how much is still available for tax-free withdrawals.

If you're dealing with complex tax situations like this, you'll probably need to talk directly with the IRS at some point. After spending 4 days trying to get through to them about a similar cost basis issue, I finally used https://claimyr.com and their service got me a callback in about 20 minutes instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that there's no specific schedule for reporting principle withdrawals, but emphasized keeping detailed records. She actually recommended using specific lot identification when selling investments to ensure you're only selling shares with the basis you intend. Made a huge difference in my understanding of how to properly handle my homegrown dividend strategy.

Just wanted to update - I actually tried Claimyr after posting my skeptical comment. Not gonna lie, I was shocked when I got a call back from the IRS in under 30 minutes. Talked to someone who clarified my whole situation with homegrown dividends. They confirmed that while there's no specific form for tracking principal withdrawals, I should keep detailed records showing the withdrawal history. They also explained how this relates to form 8949 when I do eventually sell investments with gains. Worth every penny for the time saved and peace of mind.

One approach I've found helpful is using the specific identification method when selling investments. This lets me choose exactly which shares to sell - typically the ones with the highest basis to minimize gains. Most brokerages allow this now, and it's much more tax-efficient than FIFO or average cost methods. For tracking, I just maintain a simple spreadsheet with columns for: - Original investment date and amount - Growth (unrealized gains) - Principal withdrawals (date and amount) - Remaining principal available for tax-free withdrawal Works well for my homegrown dividend strategy and takes minimal time to maintain.

Has anyone here dealt with homegrown dividends in retirement accounts vs taxable accounts? I'm trying to figure out how this works with my Roth IRA where the contributions are already post-tax.