What is a 'Capital Loss'

A capital loss is the loss incurred when a capital asset, such as an investment or real estate, decreases in value; this loss is not realized until the asset is sold for a price that is lower than the original purchase price. A capital loss is essentially the difference between the purchase price and the price at which the asset is sold, where the sale price is lower than the purchase price. For example, if an investor bought a house for $250,000 and sold the house five years later for $200,000, the investor realizes a capital loss of $50,000.

BREAKING DOWN 'Capital Loss'

For the purposes of personal income tax, capital gains can be offset by capital losses. When a position is liquidated for a sale price that is less than the purchase price, taxable income is reduced on a dollar-for-dollar basis. Net losses of more than $3,000 can be carried over to the following tax year to offset gains or directly reduce taxable income. Substantial losses carry forward to subsequent years until the amount of the loss is exhausted.

Reporting Capital Losses

Capital losses and capital gains are reported on Form 8949, on which dates of sale determine whether those transactions constitute short- or long-term gains or losses. Short-term gains are taxed at ordinary income rates that range from 10 to 39.6% in 2015. Thus, short-term losses, matched against short-term gains, benefit high-income earners who have realized profits by selling an asset within a year of purchase.

Long-term capital gains, in which investors are taxed at rates of 0, 15 or 20% when profiting from a position held longer than one year, are likewise offset by capital losses realized after one year. Form 8949 reports the description of assets sold, the cost basis of those assets and the gross proceeds from sales, ultimately determining whether aggregate sales result in a gain, loss or wash. A loss flows from Form 8949 to Schedule D, which determines the dollar amount used to reduce taxable income.

Capital Losses and Wash Sales

Wash sales involving capital loss are exemplified in the following scenarios. After dumping Apple stock on Nov. 30 to claim a loss, the Internal Revenue Service disallows the capital loss if the same stock is purchased on or before Dec. 30, requiring the investor to wait 31 days before the repurchased security can be sold again to claim another loss. The rule does not apply to the sale and repurchase of a mutual fund with similar holdings. Sidestepping the rule, a dollar amount sold in the Vanguard Energy Fund can be fully reinvested in the Fidelity Select Energy Portfolio, preserving the right to claim a subsequent loss while maintaining exposure to a similar portfolio of equities.

RELATED TERMS
  1. Capital Loss Carryover

    The net amount of capital losses that aren't deductible for the ...
  2. Tax Loss Carryforward

    A tax loss carryforward takes place where a business or individual ...
  3. Tax Selling

    A type of sale whereby an investor sells an asset with a capital ...
  4. Short-Term Loss

    A capital loss realized on the sale or exchange of a capital ...
  5. Recognized Loss

    When an investment or asset is sold for less than its purchase ...
  6. Long-Term Capital Gain Or Loss

    A gain or loss from a qualifying investment owned for longer ...
Related Articles
  1. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  2. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  3. Managing Wealth

    Capital Losses and Tax

    When an investment sells for less than its purchase price, the difference is a capital loss.
  4. Financial Advisor

    Top Tips for Deducting Stock Losses

    Investors who know the rules can turn their losing picks into tax savings. Here's how to deduct your stock losses.
  5. Financial Advisor

    How to Avoid Violating Wash Sale Rules When Realizing Tax Losses

    How to avoid violating the IRS wash sale rules when realizing capital losses in your taxable investment account.
  6. Financial Advisor

    Here's the Best Way to Skirt Capital Gains Taxes

    Taxpayers who know the rules for netting gains/losses can generate additional losses to net against the taxable gains in their portfolios. Here's how.
  7. Taxes

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  8. Financial Advisor

    Using Tax-Loss Harvesting to Keep Your Gains

    Harvesting tax losses is a key skill that investors can use to keep more of their money in their pockets the next time they file taxes.
  9. Investing

    7 Year-End Tax Planning Strategies

    Do you have a capital loss that could be booked and used to offset future tax liabilities? If so, it may be time to sell.
  10. Managing Wealth

    Understanding the Capital Gains Tax

    A capital gains tax is imposed on the profits realized when an investor or corporation sells an asset for a higher price than its purchase price.
RELATED FAQS
  1. What cost basis reporting rules are set by the Internal Revenue Service (IRS)?

    Read about the cost basis reporting regulations imposed by the Internal Revenue Service and some options available to individual ... Read Answer >>
  2. Is there a difference between capital gains and dividend income?

    Selling something for a profits leads to capital gains. A payment made by a corporations to stockholders is a dividend. Both ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center