NEOSHere's Why Dividend Investors Say NEOS ETFs Are "Tax Friendly"

What "tax friendly" actually means

Most high-yield ETFs pay you income that gets taxed this year, often at your ordinary income tax rate. If you're in the 24% bracket and collect $5,000 in a year, roughly $1,200 of that goes to the IRS before you can reinvest it.

When dividend investors call NEOS funds like $QQQI and $SPYI "tax friendly," they mean two specific things:

• Return of capital: most of the monthly distribution has been classified as ROC, which usually isn't taxed when you receive it.
• Section 1256 index options: when the fund does have option gains, they are generally taxed under a blended 60/40 rule instead of 100% short term.

NEOS says the same thing on its own fund pages. $SPYI's stated objective is high monthly income in a tax efficient manner, and both funds list Section 1256 index options and tax loss harvesting as part of the strategy.

What return of capital (ROC) is, in plain English

Return of capital is a tax label. When part of a distribution is classified as ROC, the IRS treats it as part of your own investment coming back to you rather than as income, so it generally isn't taxed when you receive it.

But that money doesn't disappear from the tax system. Every dollar of ROC lowers your cost basis, which is the number the IRS uses to figure out your gain when you sell.

What a 19a-1 notice is (and where to find it)

Whenever a fund pays a distribution that may include something other than net investment income, it must publish a Section 19(a) notice, usually called a 19a-1. It's a one-page PDF that estimates where each payout came from:

• Net investment income
• Capital gains (short or long term), when there are any
• Return of capital

How to find them, step by step:

1. Go to the fund page: neosfunds.com/qqqi or neosfunds.com/spyi.
2. Scroll down to the Distributions section.
3. Open the 19a-1 Notices for 2026. There is one PDF per monthly payout.
4. For final, IRS-reported numbers, open the Form 8937 filings on the same page.

The real ROC numbers for $QQQI and $SPYI

These figures come straight from NEOS's most recent 19a-1 notices. Each row is one monthly distribution.

Did the estimates hold up? The final IRS numbers

Estimates are one thing. The final classification is filed with the IRS on Form 8937. Here is what NEOS filed for the most recent completed periods:

Final return of capital share of each distribution, June through December 2025, per NEOS Form 8937 filings. For the 12 months ending May 2025, $SPYI's final ROC was about 94.1% to 94.2% of each distribution.

Why NEOS distributions come out as ROC

NEOS explains this on its return of capital page. In simple terms, it comes down to three things happening inside the fund:

1. Option premium becomes capital gains

Each month the fund sells index call options and collects premium. That premium is a big part of what funds the monthly payout. Because these are index options, the gains are treated as capital gains rather than as ordinary dividend income.

2. Tax loss harvesting

When stocks inside the portfolio are down, the managers can sell them to lock in a loss and buy similar exposure back. Those losses offset the fund's gains. When gains are offset, there may be no taxable earnings left to hand out, so the distribution gets classified as ROC.

3. Losses carry forward

Harvested losses don't expire. NEOS says it can carry them forward and use them in later years to offset gains in the stock portfolio or the options book.

The Section 1256 "60/40" rule

$QQQI uses Nasdaq-100 (NDX) index options and $SPYI uses S&P 500 (SPX) index options. Broad-based index options like these are generally Section 1256 contracts, which get special tax treatment:

That split applies no matter how long the contract was held, even if an option was open for only a few weeks. Single-stock options and ETF options generally don't get this treatment, so a fund selling calls on a single stock or on an ETF has its option gains taxed as short term.

Why it matters: at the top federal brackets, long-term gains are taxed at 20% and short-term gains at 37%. A 60/40 blend works out to a maximum of about 26.8% (0.60 × 20% + 0.40 × 37%), compared with 37% if everything were short term. Lower brackets see a similar gap. State taxes and the 3.8% net investment income tax can apply on top.

A simple $10,000 example

A hypothetical, rounded example to show how ROC moves your tax bill around. Your numbers will be different.

Later, if you sell those 200 shares for $10,000, your gain is $10,000 − $8,792 = $1,208. If you've held them for more than a year, that gain is generally taxed at long-term capital gains rates (0%, 15% or 20% federally, depending on your income).

Bottom line: you pay less now, you pay later instead, and what you pay later may be at a lower rate. Meanwhile the money that would have gone to taxes can stay invested and keep compounding.

The catch nobody mentions

• ⏳
  It's deferral, not a free pass. ROC lowers your cost basis, so you'll owe tax when you sell. NEOS itself warns that ROC can mean higher taxes later, even if you sell at a loss compared with what you originally paid.
• 0️⃣
  Your basis can hit zero. Under IRS rules, once ROC has reduced your basis to zero, any further ROC is generally taxed as a capital gain in the year you receive it. Long-term holders collecting large distributions should watch for this.
• 🏦
  It doesn't help inside an IRA or Roth. Those accounts are already tax-sheltered, so the ROC label changes nothing there. The benefit is in a regular taxable brokerage account.
• 🔄
  The mix can change. ROC percentages vary month to month and year to year. They depend on market conditions and on how much loss harvesting is available. Past ROC percentages don't guarantee future ones.
• 🧾
  The 19a-1 is an estimate. Always use the 1099-DIV from your broker when you file, and track your adjusted basis. Most brokers handle this, but it's worth double-checking.

Frequently asked questions

Mostly not in the year you receive them, based on recent history. NEOS estimated that 97% of $QQQI's and 94% of $SPYI's September 2026 distributions were return of capital, which generally isn't taxed until you sell. The small remaining portion is taxable income. Your 1099-DIV has the final numbers.

It's a tax classification for part of a distribution. It isn't taxed when received. Instead, it reduces your cost basis, which increases your capital gain (or shrinks your loss) when you eventually sell.

On each fund's page at neosfunds.com, under Distributions. There is one PDF for each monthly payout, plus Form 8937 filings with the final ROC numbers.

Section 1256 covers broad-based index options like the SPX and NDX options NEOS uses. Gains and losses on them are generally taxed 60% long term and 40% short term regardless of holding period, which can produce a lower blended rate than short-term treatment.

Both have been heavily ROC. $QQQI has recently run slightly higher: about 99.6% final ROC in the second half of 2025, versus about 95.3% for $SPYI. Both use Section 1256 index options.

The ROC and 60/40 advantages only matter in a taxable account. Inside a Roth or traditional IRA, distributions aren't taxed when paid anyway. Where to hold a fund depends on your whole situation, so talk to a tax professional.

Not necessarily. For NEOS funds, ROC is largely driven by tax loss harvesting and how option gains are characterized. To see whether a fund is actually losing value, check its total return and NAV trend rather than the tax label.

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