Capital Loss
What does "Capital Loss" mean in law?
A capital loss arises when a taxpayer sells or exchanges a capital asset for less than the taxpayer's adjusted basis. Under IRC Section 1211, individual taxpayers may deduct capital losses against capital gains without limitation, but may only deduct up to $3,000 of net capital losses against ordinary income per year, with excess losses carried forward indefinitely under Section 1212. In Arrowsmith v. Commissioner (1952), the Supreme Court held that the character of a loss must be determined by reference to the original transaction, establishing that gains and losses from the same underlying transaction must be treated consistently. Capital losses are subject to the wash sale rule under Section 1091, which disallows the loss if substantially identical securities are purchased within 30 days.
Definition
A capital loss arises when a taxpayer sells or exchanges a capital asset for less than the taxpayer's adjusted basis. Under IRC Section 1211, individual taxpayers may deduct capital losses against capital gains without limitation, but may only deduct up to $3,000 of net capital losses against ordinary income per year, with excess losses carried forward indefinitely under Section 1212. In Arrowsmith v. Commissioner (1952), the Supreme Court held that the character of a loss must be determined by reference to the original transaction, establishing that gains and losses from the same underlying transaction must be treated consistently. Capital losses are subject to the wash sale rule under Section 1091, which disallows the loss if substantially identical securities are purchased within 30 days.
Example
A taxpayer who sells stock at a $20,000 loss and has no capital gains that year may deduct only $3,000 against ordinary income, carrying the remaining $17,000 forward to future tax years.