Capital Loss

What Is A Capital Loss?

A capital loss is a loss sustained when the value of a capital asset, such as an investment or real estate, diminishes.

Deeper Definition

The capital loss is not realized until the asset is sold for less than the initial acquisition price. A loss occurs when a capital asset is sold for less than the amount paid for it. Capital gains can be offset by capital losses, lowering taxable income by the amount of the loss.

A capital loss is a difference between the asset’s purchase price and the price at which it is sold when the sale price is less than the purchase price.

Capital losses can offset capital gains for personal income tax purposes. Taxable income is decreased on a dollar-for-dollar basis when a position is sold for less than the acquisition price (making it exempt income). Net losses over $3,000 can be carried over to the next tax year. This is to offset gains or directly decrease taxable income. Significant losses are carried over to successive years until the amount of the loss is depleted.

Form 8949 is used to report capital losses and capital gains. The dates of sale determine whether the transactions are short-term or long-term profits or losses. Short-term yields are taxed at the same rates as ordinary income. Thus, short-term losses offset by short-term gains help high-income earners who made profits by selling an asset within a year of acquisition by lowering their taxable income.

Long-term capital gains, which are taxed at rates of 0%, 15%, or 20% when earning from a position maintained for more than a year, are also mitigated by capital losses incurred after one year.

Form 8949 summarizes the description of assets sold, their cost basis, and gross receipts from sales. It eventually shows whether total sales result in a gain, loss, or wash. Form 8949 transfers a loss to Schedule D, determining the dollar amount utilized to minimize taxable income.

Capital Loss Example

For example, if an investor bought a house for $840,000 and sold the house five years later for $700,000. The investor realizes a capital loss of $140,000.