Glossary
Capital loss
The loss from selling an asset for less than its cost basis, which can offset capital gains for US tax purposes.
A capital loss occurs when you sell an investment or other capital asset for less than its cost basis. Until you sell, a decline in value is only an unrealized, or paper, loss. Once realized in a taxable account, a capital loss has value in the US tax system, because it can reduce the tax you owe on gains and, to a limited extent, on other income.
How it is used on a US tax return
- Losses first offset gains of the same type: short-term losses against short-term gains, long-term against long-term.
- Any remaining net loss offsets net gains of the other type.
- If a net capital loss is left for the year, up to $3,000 ($1,500 if married filing separately) can be deducted against ordinary income such as wages.
- Anything beyond that carries forward to future years, with no expiry for individuals, keeping its short- or long-term character.
Rules that trip people up
- Wash sales. If you buy substantially identical securities within 30 days before or after selling at a loss, including in an IRA, the loss is disallowed for now and added to the basis of the new shares (or lost entirely in the IRA case).
- Personal-use property. Losses on a car or a home you live in are not deductible.
- Tax-advantaged accounts. Losses inside an IRA or 401(k) cannot be deducted.
Deliberately realizing losses to offset gains, while staying invested in a similar but not identical holding, is known as tax-loss harvesting.