Final answer:
A return of capital reduces an investor's cost basis in an investment, which can increase the net capital gain when the asset is sold, as the gain is calculated on the reduced cost basis.
Step-by-step explanation:
When an investor receives a return of capital, it refers to the repayment of the original investment in the stock, which reduces the investor's cost basis in that investment. This is not considered a profit but rather a partial return of the amount originally invested. Therefore, when an investor later sells the asset, the net capital gain is calculated based on the adjusted (reduced) cost basis. Suppose an investor bought a share of stock for $100, received a $20 return of capital, and then sold the share for $130. The cost basis would be adjusted to $80 ($100 - $20), and the net capital gain would be $50 ($130 - $80) instead of $30 ($130 - $100).