'Capital Loss' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Capital Loss refers to a type of loss that companies or individuals experience as one of their capital assets decreases by value. This includes a real estate or investment asset. The loss only becomes realized when the asset itself sells for less than the price for which it was originally purchased. Another way of looking at these capital losses is that they represent the difference from the asset’s purchase price and the asset’s selling price. In other words, for it to be a loss the selling price must be less than the original price. As an example, when investors purchase a home for $300,000 and then sell the same home six years later for only $260,000, they have taken a capital loss amounting to $40,000.
Where income taxes are concerned, capital losses often offset capital gains. Capital losses in fact reduce the personal or business income in a like dollar for dollar amount. When net losses are higher than $3,000, then the overage amount can not be applied. Instead, this amount higher than net $3,000 simply carries over against any other gains or taxable income to the following year when they will similarly offset capital gains and income. When losses are multiple thousands, they continue to carry forward as many years as it takes for them to be fully exhausted.
Both capital losses and capital gains will be reported using a Form 8949. This form helps taxpayers to determine if the sale dates allow for the transactions to be counted as long term or short term losses or gains. When such transactions are deemed to be short term gains, they become taxable by the individual’s ordinary income tax rates. These ranged from only 10 percent to 39.6 percent as of 2015. This is why the shorter term losses when paired off against shorter term gains give significant tax advantages to higher income earning individuals. It benefits them when they have earned profits by selling off any asset or assets in under a year from original purchase point.
With longer term capital gains, investors become taxed by rates of zero percent, 15 percent, or 20 percent. This occurs when they take a gain which results from a position they possessed for over a year. Such capital gains also can only be offset by capital losses which they realize after holding the investments for over a year. It is also on form 8949 that these assets become reportable. Here investors list out both the gross proceeds from the sales and assets’ cost basis. The two figures are compared to determine if the total sales equate to a loss, gain, or wash. Such losses become reported on Schedule D. Here the taxpayer is able to ascertain the amount that may be utilized to lower overall taxable income.
These wash sale rules can be confusing to individuals without an example. Consider an investor who dumps his IBM stock on the last day of November in order to realize a loss. The taxing authority of the Internal Revenue Service will disallow such a capital loss if the exact stock was bought again on the day of December 30th or before this. This is because investors have to wait at least 31 days before such a security can be repurchased then sold off once more in order to realize another loss.
Yet the regulation does not affect sales and re-buys of different mutual funds that possess similar positions and holdings. As an example, $10,000 worth of Vanguard Energy Fund shares may be entirely reinvested in the Fidelity Select Energy Portfolio at any point. This would not forfeit the investors’ ability to recognize another loss even as they continue to own an equity portfolio (through the mutual fund) that is similar to their earlier mutual fund holdings.