when an individual invests they put the principal to work in hopes of generating a return an amount known as the cost basis when the principal is returned to an investor that is the return of capital since it does not include gains or losses it is not considered taxable it is similar to getting your original money back 
return of capital should not be confused with return on capital where the latter is the return earned on invested capital and is taxable some types of investments allow investors to first receive their capital back before receiving gains or losses for tax purposes examples include qualified retirement accounts such as 401 k plans or iras and cash accumulated from permanent life insurance policies these products are examples of first in first out fifo because investors receive their first dollar back before touching gains cost basis is defined as an investor s total cost paid for an investment and the cost basis for a stock is adjusted for stock dividends stock splits and the cost of commissions to purchase the stock it is important for investors and financial advisors to track the cost basis of each investment so that any return of capital payments can be identified 