Capital loss

Capital Loss is a financial term that refers to the decrease in the value of an investment or real estate. It occurs when the current market price of an asset is less than the purchase price. The difference between the lower selling price and the higher purchase price results in a capital loss.

Overview

A capital loss is realized when a capital asset is sold or exchanged at a price lower than its basis. Basis is the asset's purchase price, plus commissions and the cost of improvements minus depreciation. Capital losses are used to offset capital gains from the sale or exchange of capital assets in the current tax year and can be carried forward to offset capital gains in future years.

Types of Capital Losses

There are two types of capital losses: short-term and long-term. A short-term capital loss results from the sale of a capital asset held for one year or less. A long-term capital loss results from the sale of a capital asset held for more than one year.

Tax Implications

In the United States, the Internal Revenue Service (IRS) allows individuals to use their capital losses to offset their capital gains. If the losses exceed the gains, they can offset up to $3,000 of other income. If the capital losses are more than the capital gains plus the $3,000 limit, the excess can be carried forward to future years.

Capital Loss Carryover

If an investor has a net capital loss in a tax year, they can carry it over to future years and use it to offset future capital gains. This is known as a capital loss carryover. The IRS provides a worksheet in Publication 550 for individuals to figure out their capital loss carryover.

See Also

• Capital gain
• Capital asset
• Tax loss harvesting

References

• IRS Publication 550, Investment Income and Expenses
• IRS Topic No. 409, Capital Gains and Losses