Synchrotron based in situ X-ray diffraction technique has been used to study the mechanism of capacity fading of LiCoO2 cycled to a higher voltage above the normal 4.2V limit and to investigate the mechanism of capacity retention improvement by ZrO2 surface coating on LiCoO2. It was found that the capacity fading of LiCoO2 cycled at higher voltage limit is closely related to the increased polarization rather than the bulk crystal structure damage. The capacity of uncoated LiCoO2 sample dropped to less than 70mAhg−1 when charged to 4.8V after high voltage cycling. However, when the voltage limit was further increased to 8.35V, the capacity was partially restored and the corresponding structural changes were recovered to the similar level as seen in fresh sample. This indicates that the integrity of the bulk crystal structure of LiCoO2 was not seriously damaged during cycling to 4.8V. The increased polarization seems to be responsible for the fading capacity and the uncompleted phase transformation of LiCoO2. The polarization-induced capacity fading can be significantly improved by ZrO2 surface coating. It was proposed that the effect of ZrO2-coating layer on the capacity retention during high voltage cycling is through the formation of protection layer on the surface of LiCoO2 particles, which can reduce the decomposition of the electrolyte at higher voltages.