Capital Loss
Definition
A loss incurred when a capital asset is sold for less than its purchase price. Capital losses offset capital gains and up to $3,000 of ordinary income per year, with unused losses carrying forward.
A capital loss occurs when you sell an investment for less than you paid. If you bought stock at $10,000 and sold at $7,000, you have a $3,000 capital loss. This loss can offset capital gains from other investments, reducing your tax bill.
The netting rules work in a specific order: short-term losses first offset short-term gains, long-term losses first offset long-term gains. Any remaining net losses can then offset gains of the other type. If you have net losses after all offsetting, up to $3,000 per year ($1,500 if married filing separately) reduces ordinary income.
Unused capital losses beyond the $3,000 annual limit carry forward indefinitely. If you realize $50,000 in losses with no gains, you can deduct $3,000 this year and carry the remaining $47,000 forward to future years — a valuable tax asset that you should track carefully.
Tax-loss harvesting is the intentional realization of losses to offset gains while maintaining market exposure. You sell a losing position and immediately buy a similar (but not "substantially identical") investment to capture the tax loss without changing your portfolio exposure. This is a core tax efficiency strategy.
The wash sale rule prevents you from selling at a loss and immediately rebuying the same security within 30 days (before or after the sale). If you trigger a wash sale, the loss is disallowed and added to the cost basis of the replacement shares. Using similar but not identical investments (different ETFs tracking similar indexes) avoids wash sale issues.
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Related Terms
Frequently Asked Questions
Can I use stock losses to reduce my tax bill?
Yes. Capital losses offset capital gains dollar-for-dollar. Net losses beyond gains can reduce ordinary income by up to $3,000/year. Unused losses carry forward to future years. This makes selling losing investments a strategic tax planning tool, especially at year-end.
Should I sell investments at a loss?
If the investment no longer fits your strategy, selling at a loss creates a tax benefit. If you still believe in the investment, consider tax-loss harvesting: sell, buy a similar but not identical alternative, and harvest the tax loss while maintaining market exposure. Always consider wash sale rules.