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 investment s cost basis is the capital gain on the 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 
some dividends from real estate investment trusts reits are considered a return of capital since investors get their invested funds back although they are not taxed these dividends reduce the cost basis in a reit investment example of stock splits and return of capitalassume 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 investor 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 capitala 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 calculating the return of capital for a partnership can be difficult a partner s interest in an entity is tracked in the partner s capital account and the account is increased by any cash or assets contributed by the partner along with the partner s share of profits the partner s interest is reduced by any withdrawals or guaranteed payments and by the partner s share of partnership losses withdrawal up to the partner 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 partner s personal tax return 