Capital Losses

Business Dictionary defines Capital Loss as:  Loss suffered from the sale (disposal) of a capital asset. 

The IRS states that almost everything you own and use for personal or investment purposes is a capital asset.

Examples:  your home, household furnishings, and stocks or bonds held in your personal account.

You incur a capital loss if you sell the asset for less than your basis (the amount you originally paid for the asset).

Losses from the sale of personal–use property, such as your home or car, are not deductible.    

Capital losses are classified in one of two ways: 

1. Long–term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term.
2. Short-term. If you hold it one year or less, your capital gain or loss is short-term.

Finally, a deductible capital loss can only be claimed if the asset is SOLD.  In other words, if you have suffered losses in this year’s stock market, it’s not a capital loss unless you sold the stock.

Deductible capital losses are reported on Form 1040, Schedule D (PDF).

If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is limited to $3,000, or $1,500 if you are married filing separately. If your net capital loss (total loss minus total gain + allowable limit) is more than this limit, you can carry the loss forward to later years. 

Example: You have a capital gain this year of $10,000, but a capital loss of $43,000.  You can deduct $13,000 of your capital loss this year (offsetting the $10,000 gain PLUS the additional $3,000 limit).  If you realize no future capital gains, you can write of the remaining $30,000 over the next ten years.

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