Capital Loss

A capital loss occurs when you sell an investment for less than your purchase price. While losing money feels bad, capital losses have valuable tax benefits.

How It Works:

• You buy stock for $10,000
• You sell it for $7,000
• Capital Loss: $3,000

Tax Benefits:

1. Offset Capital Gains: Losses cancel out gains dollar-for-dollar:

• Stock A gain: +$8,000
• Stock B loss: -$3,000
• Taxable gain: $5,000 (not $8,000)
• Tax savings: $450-$600 depending on bracket

2. Offset Ordinary Income: If losses exceed gains, you can deduct up to $3,000/year from regular income:

• Total losses: $10,000
• Total gains: $2,000
• Net loss: $8,000
• Deduct $3,000 from income this year
• Carry forward remaining $5,000 to next year

3. Unlimited Carryforward: Unused losses carry forward forever until used up.

Tax Loss Harvesting: Strategic selling of losing investments in down markets to reduce tax bills. Common in December.

Example:

• You have $20,000 in realized gains (sold winners)
• Tax bill: $3,000 (15% capital gains rate)
• You also have stocks down $15,000 (unrealized losses)
• Harvest losses: Sell losers, rebuy similar (not identical) investments
• $15,000 loss offsets $15,000 of gains
• Taxable gains now: $5,000
• New tax bill: $750 (saved $2,250!)

Wash Sale Rule: Can't claim a loss if you buy the "substantially identical" investment within 30 days before or after the sale. IRS will disallow the loss.

Example Violation:

• Dec 15: Sell Apple stock for $5,000 loss
• Dec 20: Buy Apple stock again
• Result: Loss disallowed, added to cost basis of new shares

Workaround: Sell Apple, wait 31 days, then rebuy OR buy a similar ETF instead (QQQ, VGT).