Capital loss
Definition
Capital loss
A capital loss occurs when you sell a capital asset (stocks, bonds, real estate, or crypto) for less than your cost basis. It mirrors capital gains and, under IRS rules, lets you offset gains and a slice of ordinary income each year.
The loss is only “realized” once the sale closes — a paper loss on a held position doesn’t count. That distinction matters because the IRS taxes gains and permits deductions strictly on realized transactions.
Investors treat capital losses as a portfolio-management tool — not a failure. Harvested carefully, they trim tax bills, complement dividend income, and compound after-tax returns over decades.
Capital losses cut across every asset class the IRS calls “capital,” from securities to real estate to digital assets. They also apply globally, since most tax jurisdictions recognize a version of the same rules, though thresholds vary.
Key takeaways
- A capital loss is the shortfall when a capital asset sells below its cost basis.
- Losses first offset same-bucket gains (short or long), then the opposite bucket, then ordinary income.
- The IRS caps the deduction against ordinary income at $3,000 per year, with indefinite carryforward.
- Wash-sale rules disallow the loss if you repurchase the same or a substantially identical security within 30 days.
- Tax-loss harvesting is the deliberate practice of selling losers to bank the deduction.
How it works
A capital loss triggers only when you actually sell the asset at a price below your cost basis. The IRS then sorts the loss by holding period (short-term or long-term) and nets it against gains of the same bucket first.
Short-term losses (assets held ≤1 year) first offset short-term gains, which are taxed as ordinary income. Long-term losses (held >1 year) first offset long-term gains, taxed at 0%, 15%, or 20%.
If losses exceed gains, the excess offsets the other bucket. Anything left over can shave up to $3,000 off ordinary income per tax year, per IRS Topic 409. Unused losses roll forward indefinitely under IRS Publication 550.
The wash-sale rule blocks the loss if you buy the same or a “substantially identical” security within 30 days before or after the sale. Fidelity’s wash-sale guide and NerdWallet’s 10 rules of tax-loss harvesting both walk through the trap.
Cost basis tracking sits at the heart of loss calculation. Brokerages report basis and holding period on Form 1099-B for stocks and bonds; investors reconcile that to Schedule D and Form 8949 at filing.
| Holding period | Tax treatment (net gain) | Offsets first | Annual ordinary-income cap |
|---|---|---|---|
| Short-term (≤1 year) | Ordinary income rates | Short-term gains | $3,000 |
| Long-term (>1 year) | 0%, 15%, or 20% | Long-term gains | $3,000 |
| Net capital loss | Offsets other bucket, then ordinary income | Either bucket | $3,000/year, indefinite carryforward |
Examples
Real-world capital losses show up across asset classes. A crypto exit at a discount, a mispriced tech stock sold in a rebalancing sweep, or an inherited rental property closing below basis — each generates a deductible loss that a taxpayer can put to work.
In 2022, a rough crypto year, investors booked heavy capital gains offsets after Bitcoin’s slide from roughly $47,000 to $16,500. Harvesting through the drawdown let them park losses for future gains.
Vanguard’s 2024 tax-loss harvesting research found systematic harvesting can add roughly 0.47%–1.27% in annual after-tax return, depending on tax bracket and holding period.
Asset allocation shifts also produce planned losses. An investor rotating out of an overweight small-cap slice in 2024 could book realized losses on outgoing positions while redeploying cash into large-cap or bond sleeves.
Bond holders in 2022 saw meaningful losses as interest rates climbed and prices fell. Rebalancers who sold aging bond positions harvested those losses against equity gains that year.
Related terms
- Capital Gains: the profit realized when a capital asset sells above its cost basis.
- Bond: a debt instrument whose price movements often produce realized losses when rates rise.
- Interest Rate: the cost of borrowing that drives bond and equity valuations and, by extension, realized losses.
- Dividend: a cash or stock payout to shareholders, separate from capital gains and losses.
- Asset Allocation: the portfolio mix across stocks, bonds, and cash that shapes loss exposure.
- Growth Investing: a strategy weighted toward high-multiple stocks with wider drawdown risk.
- Value Investing: a strategy leaning on undervalued assets, often with lower realized-loss volatility.
FAQ
What is a capital loss?
A capital loss is the shortfall when you sell a capital asset for less than what you paid. It applies to stocks, bonds, real estate, crypto, and most investment property. Paper losses don’t count until you close the sale.
How much capital loss can you deduct against ordinary income?
Under IRS rules, taxpayers can deduct up to $3,000 of net capital loss against ordinary income each year — $1,500 if married filing separately. Anything above that carries forward indefinitely until fully used.
What is the wash-sale rule?
The wash-sale rule disallows a capital loss if you repurchase the same or a substantially identical security within 30 days before or after the sale. The disallowed loss folds into the new position’s cost basis instead.
Are crypto capital losses treated the same as stock losses?
The IRS classifies most crypto as property, so crypto losses follow the same short-term and long-term treatment as stocks. The wash-sale rule technically does not apply to crypto today, though pending legislation could change that.
Does tax-loss harvesting work inside a 401(k) or IRA?
No. Losses inside a 401(k), IRA, or other tax-advantaged account can’t be harvested because gains and losses aren’t taxed until distribution. Harvesting only pays off inside a regular taxable investment account.
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