# Return Of Capital

## What is 'Return Of Capital'

Return of capital is a payment received from an investment that is not considered a taxable event and is not taxed as income. Instead, return of capital occurs when an investor receives a portion of his original investment, and these payments are not considered income or capital gains from the investment.

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## BREAKING DOWN 'Return Of Capital'

Cost basis is defined as an investorâ€™s total cost paid for an investment, and cost basis for a stock is adjusted for stock dividends and stock splits, as well as for the cost of commissions to purchase the stock. Itâ€™s important for investors and financial advisors to track the cost basis of each investment so that any return of capital payments can be identified.

## How Capital Gains Are Calculated

When an investor buys an investment and sells it for a gain, the taxpayer must report the capital gain on a personal tax return, and the sale price less the investmentâ€™s cost basis is the capital gain on sale. If an investor receives an amount that is less than or equal to the cost basis, the payment is a return of capital and not a capital gain.

## Instances Where Stock Splits Impact Return of Capital

Assume, for example, that an investor buys 100 shares of XYZ common stock at \$20 per share and the stock has a 2-for-1 stock split, so that the investorâ€™s adjusted holdings total 200 shares at \$10 per share. If the investor sells the shares for \$15, the first \$10 is considered a return of capital and is not taxed. The additional \$5 per share is a capital gain and is reported on the personal tax return.

## Factoring in Partnership Return of Capital

A partnership is defined as a business in which two or more people contribute assets and operate an entity to share in the profits. The parties create a partnership using a partnership agreement, though calculating return of capital for a partnership can be difficult.

A partnerâ€™s interest in a partnership is tracked in the partnerâ€™s capital account, and the account is increased by any cash or assets contributed by the partner, along with the partnerâ€™s share of profits. The partnerâ€™s interest is reduced by any withdrawals or guaranteed payments, and by the partnerâ€™s share of partnership losses. A withdrawal up to the partnerâ€™s capital account balance is considered a return of capital and is not a taxable event. Once the entire capital account balance is paid to the partner, however, any additional payments are considered income to the partner and are taxed on the partnerâ€™s personal tax return.

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