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.