Capital Loss

Investment Dictionary -> Capital Loss

The capital loss is a decrease in the value of capital assets. If the purchasing cost is higher than the selling price, the result is capital loss. One can claim capital losses from the sale of real assets, such as machinery and equipment, or financial assets, for example, bonds. Capital loss may be incurred by the sale of intangible assets such as trademarks. Unlike the United States, other countries apply different rules to capital losses. Canada, for instance, allows for the deduction of capital losses only when the assets are securities (for instance, bonds, mutual funds, and stock).

The capital losses are also defined as short-term and long-term, in view of the period the assets are held. Short-term capital loss is incurred on investments that are held less than one year. Capital assets that are sold after the period of twelve months are considered long-term. The acquisition day shall be excluded when calculating the length of the period.

The short-term capital losses are eligible for ordinary income deductions. Here, the net capital loss represents a deduction from the rest of the income by up to $3000. If the net capital loss exceeds the capital loss ceiling of $3000, one cannot claim the entire amount of losses for the current year. The additional capital loss is carried over to the next calendar year. In this case, the extra loss is treated as a new capital loss at the beginning of the carryover year. It is important to note that only sold assets qualify as capital losses. The deflated price of the stock in one's portfolio does not entitle one to income deductions.

Long-term net capital losses are incurred when the capital loss exceeds the gain. One can claim a deduction of up to $3000 for the current year. The carryover shall be long-term if the net capital loss is greater than the capital loss ceiling. This limitation applies to the cases when the short-term and the long-term transactions turn both negative. However, the short-term capital loss shall be claimed first.

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