To improve the performance of Li-ion batteries (LIBs), it is essential to understand the behaviour of Li ions during charge-discharge cycling. However, the analytical techniques for observing the Li ions are limited. Here, we present the complementary use of scanning transmission electron microscopy and atom probe tomography at identical locations to demonstrate that the evolution of the local Li composition and the corresponding structural changes at the atomic scale cause the capacity degradation of Li(Ni0.80Co0.15Mn0.05)O2 (NCM), an LIB cathode. Using these two techniques, we show that a Li concentration gradient evolves during cycling, and the depth of the gradient expands proportionally with the number of cycles. We further suggest that the capacity to accommodate Li ions is determined by the degree of structural disordering. Our findings provide direct evidence of the behaviour of Li ions during cycling and thus the origin of the capacity decay in LIBs.