RETURN OF CAPITAL
Back to GlossaryDefinition
When payment is received that reduces an asset’s acquisition costs because some part of what was originally owned no longer exists.
Summary
Return of Capital is a financial concept where an investor receives money back that represents a portion of their original investment, rather than earnings or profits. This payment reduces the cost basis (original purchase price) of the asset because part of what was originally owned has been distributed back to the investor. Unlike dividends or interest which are considered income, return of capital is essentially getting back part of your own money, so it's typically not taxed as income but instead reduces your investment's cost basis for future tax calculations.
Usage Context
Understanding return of capital is crucial when analyzing investment performance, calculating taxes on investment returns, determining the true profitability of investments, and making decisions about asset allocation and portfolio management.
Common Confusions
- Thinking return of capital is the same as earning a profit on an investment
- Confusing return of capital with regular dividend payments
- Not understanding that return of capital reduces the cost basis of the investment
- Assuming all cash payments from investments are taxable income
- Believing that return of capital always indicates poor investment performance
