What Is Return of Capital?

Return of capital explained in less than five minutes

An investor looks over a 1099-DIV.

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Return-of-capital distributions are non-dividend returns of some or all of the investments you make in a stock or fund. These distributions are tax-free but can have tax implications.

Learn more about what return-of-capital distributions are, how they work, and what individual investors need to know.

Definition and Examples of Return of Capital

Return of capital, also known as “ROC,” is a return of some or all of an investment in a stock or fund. ROC distributions aren't considered dividends even though ROC could be included in a fund distribution because a ROC is the original money you invested. While your fund provides tax liability estimates throughout the year, the 1099-DIV the fund sends at the end of the year will show the exact amount of ROC you received during the year.

An example of a ROC would be when a fund pays out a distribution comprising the returns a fund generated, plus the money you invested. The returns are considered income, while the return of your capital is not.


As long as the returns a fund generates outpace the return of capital it disburses, your fund should continue to grow.

How Does Return of Capital Work?

Let’s say that you buy 100 shares of a fund at $10 per share. Your initial purchase cost $1,000 (100 x $10), making your initial per share cost basis $10 ($1,000/100). If you buy another 100 shares at $12 per share, you would now have spent $2,200 (100 x $10) + (100 x $12) in acquiring 200 shares. This would make your overall cost basis $11 ($2,200/200).

Now suppose over one year, the fund pays you a $4 distribution per share, resulting in an $800 payment (200 shares x $4) at the end of the year. 

When you receive your 1099-DIV, you find out that $3 of the distribution came from income and interest the fund earned and $1 was a ROC. 

Because $1 of your annual distribution per share was a ROC, your adjusted cost basis goes down from $11 to $10. Because your cost basis went down $1, if you sell your shares at a profit, your realized capital gains go up $1.


An all-too-common misconception about return of capital distributions is that they aren’t as valuable as other fund distributions, like dividends and capital gain distributions, which are viewed as “earned.” Because ROC distributions aren’t based on fund returns, some feel they are “unearned,” which isn’t the case.

Tax Implications

Return of capital distributions aren’t taxable, but they do have tax implications because they might produce additional realized capital gains. Selling a share at $11 when your cost basis is $10 will result in a $1 capital gain. But if your ROC was $2, then your per-share capital gain is $3:

   Fund with no ROC  Fund with ROC
Purchase price $10 $10
Return of capital $0 $2
Sale price $11 $11
Capital gains liability $1 $3

The IRS expects you to know your capital gains totals based on not just the difference between your buy and sell prices but your return of capital, too.

What It Means for Individual Investors

Being aware of how return of capital works can help you understand how capital gains could affect you. When you sell your shares for more than the cost basis, more of that money will be considered capital gains than if you hadn’t received the ROC distribution.

While that may sound like a negative, return of capital gives you the chance to earn non-taxable monthly cash flow, and you can defer capital gains taxes until you sell your shares 


After the adjusted cost basis of the stock is reduced to zero, any further non-dividend distribution becomes a taxable capital gain that must be reported.

Return of Capital vs. Dividends

While return of capital distributions can feel like dividends being paid out, these distributions can have different implications. 

Return of capital distributions Dividends
Occurs when you are returned part of or all of your initial investment Distributed from a corporation’s profit and earnings
Reduces the adjusted cost basis of your stock Payer of the dividend must identify each type and amount of dividend for the investor so they can report them for taxes with Form 1099-DIV 

If you’re unsure if a distribution is a standard dividend or a ROC, you can review IRS guidelines regarding how and when both occur. 

Key Takeaways

  • Return of capital is relatively common in mutual fund investing.
  • When someone receives a return of capital, they are getting some or all of their investments in a company or fund back. 
  • It’s easy to confuse dividends with return of capital, but these two distributions function differently.

How Does Return of Capital Affect My Stock Ownership?

When you receive a return of capital you are getting back part or all of your investment in a stock of the company and that money is no longer invested.

How Is Return of Capital Taxed?

While ROC distributions aren’t subject to current tax, once the adjusted cost basis of the stock is reduced to zero, any non-dividend distributions are considered to be a taxable capital gain.

What Is a Normal Rate of Return of Capital?

There is no one “normal” rate of return of capital that investors can expect as the net asset value, total return on the investment, and the distribution rate can affect the rate of return differently.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Topic No. 404: Dividends."

  2. Eaton Vance. "Return of Capital Distributions Demystified," Page 1.

  3. Fidelity. "Return of Capital: Part 3."

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