Short-Term Loss

What Is a Short-Term Loss?

The term “short-term loss” generally refers to a loss on the sale or other disposition of a capital asset. A short-term capital loss is realized for federal income tax purposes when an asset—such as a stock, bond, or investment real estate—that has been owned for a year or less is sold at a loss. A short-term unrealized loss refers to the decline in value of an asset currently held by a taxpayer for a year or less to an amount below its adjusted tax basis.

An asset’s adjusted tax basis is its total acquisition cost, i.e., purchase price plus related costs such as taxes and commissions, increased by the cost of any improvements and reduced by cost recovery deductions, e.g., depreciation or amortization, if any, claimed in determining income tax liability. Net capital losses, whether short-term or long-term, are limited to a maximum deduction of $3,000 per year, which can be used against against earnings or other ordinary income.

Taxpayers should be aware that they cannot deduct a loss realized on any asset held for personal use, such as a personal residence or automobile.

Key Takeaways

  • A deductible short-term capital loss is a loss realized on the sale of investment property that has been held for one year or less.
  • The amount of a short-term loss is the excess of the adjusted tax basis of the capital asset over the amount received for it. 
  • In calculating annual tax liabilities, short-term losses first offset short-term capital gains; long-term losses offset long-term gains. Results of these calculations are netted; if any net capital losses remain unused, up to $3,000 of such losses can be deducted from ordinary income.
  • For 2022, capital loss deductions against short-term capital gains and ordinary income result in tax savings of up to 37% of the amount of offset gains and/or ordinary income; if capital losses offset long-term gains, tax savings can equal up to 20% of the offset long-term gains.

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 a taxpayer has long-term capital gains and losses for the year, the long-term losses must be offset against long-term gains. Then any short-term losses can offset long-term gains, or vice versa. Net losses of either type can then be deducted from the other kind of gain.

If the net result of these offsetting calculations is a loss, the taxpayer can deduct up to $3,000 of the net capital loss against ordinary income for the year. Net loss in excess of $3,000—or $1,500 for those married filing separately—must be deferred until the following year.

For example, if a taxpayer realizes a net capital loss of $10,000 in 2022, $3,000 of the loss can be deducted in calculating the taxpayer's tax liability for 2022, the year of the loss. The remaining $7,000 of losses can be carried forward. Assuming no additional capital gains or losses, the taxpayer can deduct $3,000 of the losses in each of the next two years, 2023 and 2024, and can deduct the final $1,000 in 2025, the third year following the sale of the assets.

Example: Tax Savings from Capital Losses

In addition to offsetting capital gains and thereby eliminating tax liabilities with respect to the gains, capital losses can produce tax savings. 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 less than $500 of net long-term gain, the unused excess capital loss can be deducted from ordinary income, and thus can wipe out the tax liability on the $500 of ordinary income.

For most taxpayers, the tax savings on long-term capital gains that are offset is either zero or 15% of the gain; for higher-income taxpayers, the savings is 20% of the gain. However, tax deductions for losses offsetting up to $3,000 of ordinary income for a year can result in greater savings for taxpayers whose income falls into the income tax brackets between 22% and 37%.

If you have an overall net capital loss for a year, you can deduct up to $3,000 of that loss against ordinary income—for example, salary and interest income. If your marginal tax rate is 22%, a $3,000 deduction from ordinary income will reduce your tax bill for the year by $660; if the marginal rate is 37%, the savings will be $1,110.

Because of progressive tax rates, the higher your marginal tax rate, the greater the tax savings from such deductions. Taxpayers can carry over any unused excess net capital loss to subsequent years and deduct the excess in the later years. As noted above, when using a 'married filing separately' filing status, however, the annual net capital loss deduction limit against ordinary income is only $1,500.

What Is a Short-Term Capital Loss?

For tax purposes, a short-term capital loss is loss from the sale or other disposition of a capital asset that has been owned by the taxpayer for one year or less. The amount of the loss is the excess of the asset’s adjusted tax basis over the amount received from the asset’s disposition.        

Can I Claim a Tax Deduction for a Short-Term Capital Loss?

Yes. Short-term capital losses can be deducted against short-term gains.  Any excess short-term losses can then be deducted against net long-term capital gains. Any remaining net capital losses, whether short-term or long-term, can then offset up to $3,000 of ordinary income, such as earnings and interest income for the year. If the excess net capital losses for year are more than $3,000, the remaining unused capital losses can be carried forward and deducted in future tax years in accordance with the rules for capital loss deductions.

Can I Take a Short-Term Loss Deduction on Any Type of Capital Asset?

No. Capital loss deductions, both short-term and long-term, can be claimed for realized losses on capital assets that were held for investment, for example, stocks, bonds, and investment real estate. Tax code rules on offsetting capital gains and the annual $3,000 limitation on deductions for net capital losses apply. However, no tax deductions are allowed for either short-term or long-term losses realized on capital assets that were held for personal use, such as a residence or personal automobile.   

The Bottom Line

All capital losses, including short-term capital losses, can provide taxpayers with tax-savings deductions, subject to the tax-code's rules for offsetting calculations and its ceilings on deductions against ordinary income. The calculation of the deductible amount of short-term losses for a year requires netting such losses first against short-term gains and then against net long-term capital gains, if any. Then, if unused capital losses remain, a maximum of $3,000 of net capital losses, whether short- or long-term, can be deducted annually to reduce ordinary income. However, taxpayers who file as "married filing separately" are subject to an annual ceiling of $1,500 of such losses. Any unused capital losses in excess of the applicable ceiling can be used in future years.

Taxpayers should be aware that losses on some capital assets are not deductible. They can claim deductions for capital losses, whether short-term or long-term, on the sale or other taxable disposition of investment assets held for a year or less. But losses on assets held for personal use, such as a residence or automobile, are not deductible.

Article Sources
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  1. Cornell Law School. Legal Information Institute. “26 US Code §1222 (2). Other terms relating to capital gains and losses.”

  2. Internal Revenue Service. "Topic No. 409, Capital Gains and Losses."

  3.   Internal Revenue Service. ”Topic No. 703: Basis of Assets.”

  4. Internal Revenue Service. "Topic No. 409, Capital Gains and Losses."

  5. Internal Revenue Service. “2021 Instructions for Schedule D Capital Gains and Losses.” Page D-3.

  6. Internal Revenue Service. “Schedule D (Form 1040).”

  7. Internal Revenue Service. "Helpful Facts to Know about Capital Gains and Losses."

  8. Internal Revenue Service. "2021 Instructions for Schedule D," Page 4.

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