Components of Return

What this video covers

• The four components of return: interest, dividends, realized gains, and unrealized gains, and which two count as income versus capital changes
• Why unrealized gains are called paper gains, and the exam trap of treating an unsold gain as realized
• The exact trigger that converts an unrealized gain to a realized gain: completing the sale transaction
• What return of capital is, why it is not income, and why it is not taxable when received
• How return of capital reduces cost basis dollar-for-dollar, with the step-by-step math from investment to adjusted basis to future taxable gain
• Why return of capital is common with real estate investment trusts (REITs), master limited partnerships (MLPs), and some mutual funds
• What happens once cost basis hits zero: any additional return of capital becomes taxable as a capital gain