capital loss
The loss realized from the sale of a capital asset when the selling price is less than the purchase price, which can offset capital gains for tax purposes.
Example
“She sold the stock at a $5,000 loss, which she used to offset $5,000 in capital gains, reducing her tax bill.”
Memory Tip
Capital LOSS = the opposite of capital gain. Sell for less than you paid.
Why It Matters
Capital losses are important because they can reduce your tax burden by offsetting capital gains and, in some cases, offsetting ordinary income. Understanding how to use capital losses strategically can help you minimize the taxes you owe each year and improve your overall investment returns.
Common Misconception
Many people believe that capital losses only occur when you sell stocks or investments, but capital losses can happen with any capital asset including real estate, collectibles, and business property. Another misconception is that capital losses are wasted if you do not have capital gains that year, when in fact you can carry losses forward to future years.
In Practice
Suppose you bought 100 shares of a stock for $5,000 and sold them for $3,000, creating a $2,000 capital loss. If you also had a capital gain of $2,000 from another investment that year, the capital loss would completely offset it, meaning you would owe zero tax on those transactions. If you had no other gains, you could use up to $3,000 of the loss to offset ordinary income and carry the remaining $500 forward to next year.
Etymology
From Latin 'capitalis' (principal) + Old French 'los' (loss, damage).
Common Misspellings
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