In the tax world, a capital loss means selling something for less than you originally paid for it.
(Note: these “Glossary” posts are intended to be simplified overviews of tax terms; of course there’s a lot more to a capital loss than just “less than you originally paid for it.”)
Sometimes selling something at a loss results in no tax deduction. For example, if you sell your house for a loss, it’s not deductible because the house was personal property. Same thing with your car, or your TV, or anything else you used personally.
Property held for investment — such as stocks — can generate a deductible loss, and this is where the capital loss limit applies.
A deduction is allowed on your tax return for capital losses, but the amount of deduction is limited to $3,000 per year.
You bought stock several years ago for $5,000. This year you sell the stock when it was only worth $1,000. That’s a $4,000 loss. On your tax return, you’ll get to deduct $3,000 of that loss. The other $1,000 carries forward and you can claim it next year.
What if You Have a Mix of Gains and Losses?
Using our example above, let’s say you also sold other stock for a gain of $5,000. In that case, your $4,000 loss gets applied against the $5,000 gain, resulting in a taxable gain of $1,000 on your tax return.
Different rules apply to losses from business property. With business property, there’s a code section called Section 1231, which says, regarding capital gains and losses from business property:
- Gains are taxed as capital gains (i.e. given preferential tax rates)
- Losses are deductible in full (not subject to the $3,000 limit)
Visit the Glossary page on this website for more tax terms in simplified wording.
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”