What is a 'Short-Term Loss'

A short-term loss is realized when an asset is sold at a loss that's only been held for less than one year. A short-term unrealized loss describes a position that is currently held at a net loss to the purchase price, but has not been close out (inside of the one-year threshold). Net short-term losses are limited to a maximum deduction of $3,000 per year, which can be used against earned or other ordinary income.

BREAKING DOWN 'Short-Term Loss'

Short-term losses are determined by calculating all short-term gains and losses declared on Part II of the IRS Schedule D form. If the net figure is a loss, then any amount above $3,000 -- or $1,500 for those married filing separately -- must be deferred until the following year. For example, if a taxpayer has a net short-term capital loss of $10,000, then he can declare a $3,000 loss each year for three years, deducting the final $1,000 in the fourth year following the sale of the assets.

Short-term losses play an essential role in calculating tax liability. Losses on an investment are first used to offset capital gains of the same type. Thus, short-term losses are first deducted against short-term capital gains, and long-term losses are deducted from long-term gains. Net losses of either type can then be deducted from the other kind of gain.

Example of Short-Term Loss

For example, if you have $1,000 of short-term loss and only $500 of short-term gain, the net $500 short-term loss can be deducted against your net long-term gain, should you have one. If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income, for example. Investors can enjoy the benefit of any excess net capital loss being carried over to subsequent years, to be deducted from capital gains and against up to $3,000 of other kinds of income. As noted above, when using a 'married filing separate' filing status, however, the annual net capital loss deduction limit is only $1,500.

  1. Capital Gains Tax

    A capital gains tax is a tax for capital gains incurred by individuals ...
  2. Capital Loss Carryover

    Capital loss carryover is the amount of capital losses a person ...
  3. Tax Deduction

    A tax deduction lowers a person’s tax liability by lowering his ...
  4. Itemized Deduction

    Itemized deductions allow taxpayers to take out more from their ...
  5. Deductible

    For taxes, a deductible is the expenses subtracted from adjusted ...
  6. Schedule D

    Schedule D is a tax form attached to Form 1040 that reports the ...
Related Articles
  1. 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.
  2. Taxes

    An Overview of Itemized Deductions

    Itemized deductions will mostly stay the same for 2017 tax year (medical deductions improve under the new tax bill). Big changes start in 2018.
  3. Personal Finance

    11 Tax Deductions You Can't Actually Write Off

    These are some of the most common tax write-offs that you can't really claim.
  4. Retirement

    Top Tax Tips for Retirees

    Filing your taxes during retirement can be just as time consuming as when you were employed. We have some tips to help you out.
  5. Taxes

    7 Ways To Minimize Your 2014 Taxes By December 31

    The year's not quite over yet. See whether taking any of these steps would leave you owing less in 2014 taxes, come April.
  6. 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.
  7. Taxes

    9 Ways the New Tax Law Affects Millennials

    The new tax bill, the Tax Cuts and Jobs Act, includes some important changes for Millennials.
  8. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  9. Taxes

    Smart Year-End Tax Moves for 2016 (Part Two)

    Here's are some crucial tax planning strategies for investments, Social Security and Medicare.
Trading Center