What Is a Short-Term Loss?
A short-term loss refers to a loss incurred when selling or disposing of a capital asset held for a year or less. This loss is recognized for federal income tax purposes when the sale price is lower than the purchase price. Common assets where short-term losses may occur include stocks, bonds, and real estate investments. However, losses on personal use assets like a primary residence or car are not tax-deductible.
Key Takeaways
- A short-term loss is incurred on the sale of a capital asset held for 12 months or less when the sale price is less than the purchase price.
- Deductible short-term capital losses are realized when selling investment property held for one year or less.
- The amount of a short-term loss is the difference between the adjusted tax basis of the capital asset and the amount received.
- Short-term losses offset short-term gains first, while long-term losses offset long-term gains.
- If there’s a net loss, up to $3,000 of the net capital loss can be deducted against ordinary income each year.
How Short-Term Losses Work
When selling an asset, a gain or loss can be realized. A gain occurs when the sale price is higher than the purchase price, while a loss occurs when the sale price is lower. These gains or losses can be categorized as long-term or short-term based on the duration the asset was held.
Tax-deductible losses apply to certain assets like stocks, bonds, and real estate investments but not personal property like a primary residence or vehicles. These losses, known as short-term capital losses, can be reported on IRS Schedule D.
- Long-term losses offset long-term gains, followed by offsetting short-term losses against long-term gains or vice versa.
- Any remaining losses of either type can be deducted from the other type of gain.
In case of a net loss, taxpayers can deduct up to $3,000 of the net capital loss against ordinary income for the year. Excess losses can be carried forward to subsequent years.
Realized losses occur upon disposing of an asset, while unrealized losses happen when an asset’s value decreases but is not sold.
Special Considerations
An unrealized short-term loss indicates a decrease in an asset’s value held for a year or less below its adjusted tax basis.
The adjusted tax basis of an asset includes its acquisition cost plus related expenses like taxes and commissions, reduced by cost recovery deductions such as depreciation or amortization for tax calculations.
Net capital losses, both short-term and long-term, are generally deductible up to $3,000 per year against ordinary income.
Short-Term Loss vs. Long-Term Loss
Short-term losses occur on assets held for 12 months or less, while long-term losses apply to assets held for over 12 months.
Taxpayers benefit more from short-term losses as they can offset short-term gains, which are subject to higher tax rates, compared to long-term losses.
Examples of Short-Term Losses
Capital losses not only offset gains but can also lead to tax savings. For instance, a short-term loss of $1,000 against short-term gains of $500 can reduce the tax liability on any net long-term gain. Any excess losses can offset ordinary income, potentially eliminating tax on that portion.
While most taxpayers may see zero or 15% savings on long-term gains, deductions for up to $3,000 of ordinary income from losses can result in greater savings, particularly for those in higher tax brackets.
Deducting up to $3,000 of net capital losses against ordinary income can reduce tax bills, especially for higher earners. Unused losses can carry over to future years or offset gains after the deduction limit is reached.
What Is a Short-Term Capital Loss?
A short-term capital loss occurs from selling a capital asset owned for a year or less. The loss is the difference between the asset’s adjusted tax basis and the amount received from its sale.
Can I Claim a Tax Deduction for a Short-Term Capital Loss?
Short-term capital losses can be offset against short-term gains, and any excess losses can then reduce net long-term capital gains. Remaining losses beyond this can offset up to $3,000 of ordinary income, impacting tax liabilities for the year.
Can I Take a Short-Term Loss Deduction on Any Type of Capital Asset?
Short-term and long-term capital loss deductions are applicable only to investment assets like stocks, bonds, and real estate, not personal assets such as a residence or personal vehicle.
The Bottom Line
All capital losses, including short-term ones, can offer tax-savings deductions within tax code limits. Calculating the deductible amount involves offsetting short-term losses against gains and eventually against long-term gains, if any.
Up to $3,000 of net capital losses can be deducted annually against ordinary income, subject to certain limitations. Married couples filing separately have a lower deduction limit for capital losses.
Capital losses on investment assets can be deducted, while losses on personal assets are generally not tax-deductible.