A capital loss is the loss made when a capital asset, such as a share, bond, fund unit or cryptocurrency, is sold or disposed of for less than its cost basis. It is the mirror image of a capital gain. Most tax systems let investors use capital losses to reduce taxable capital gains, and some allow a limited amount to offset other income, which makes losses a planning tool as well as a setback.
A fall in market value is only an unrealized loss until the asset is sold; the sale realizes it. The US tax code limits how much net loss individuals may deduct each year and carries the rest forward, and it blocks losses from sales that are quickly reversed through the wash-sale rule. Losses on personal-use property, such as a family car or main home, are generally not deductible at all.
Capital loss in plain terms
Suppose you bought a used car to resell, paid 5,000, and could only sell it for 4,000. You are 1,000 worse off than when you started. That shortfall is your loss, and it becomes real the moment you sell.
The tax rules recognise that investing is not one-way. If you made money on one investment and lost money on another in the same year, you are usually taxed only on the overall result. And if your losses are bigger than your gains, some countries let you keep the unused part and set it against future gains, like a credit note you can spend later.
How capital losses offset gains in the US
At year-end, US taxpayers net their gains and losses on Schedule D. Short-term losses are first set against short-term capital gains, and long-term losses against long-term capital gains; any net loss in one group then offsets net gains in the other. According to IRS Topic 409, if the result is a net capital loss, up to $3,000 a year ($1,500 for married individuals filing separately) can be deducted against ordinary income such as wages. Any remaining loss is carried forward to later years with no time limit for individuals, keeping its short- or long-term character, though an unused carryover ends with the taxpayer's death.
A worked example: an investor realizes a $4,000 short-term gain and a $12,000 long-term loss in 2026. The loss first wipes out the $4,000 gain, leaving an $8,000 net loss. Of that, $3,000 reduces ordinary income in 2026 and $5,000 carries forward to 2027. If the investor has no gains in 2027, a further $3,000 is used then and $2,000 carries into 2028.
Corporations follow different rules: their capital losses can only offset capital gains, but unused losses may generally be carried back three years and forward five.
The wash-sale rule
Under section 1091 of the Internal Revenue Code, a loss on the sale of stock or securities is disallowed if the taxpayer buys substantially identical securities within 30 days before or after the sale, a 61-day window. The rule stops investors from selling purely to book a tax loss while keeping the same position.
- The loss is deferred, not lost. The disallowed amount is added to the cost basis of the replacement shares, so it reduces the gain or increases the loss when those shares are eventually sold.
- Purchases in other accounts count. Buying the same security in a spouse's account or in an individual retirement account (IRA) can trigger the rule. Under IRS Revenue Ruling 2008-5, a loss triggered by an IRA purchase is not added to any basis and is effectively lost for good.
- Reinvested dividends count. Automatic dividend reinvestment into the same security within the window can cause a partial wash sale.
- "Substantially identical" is a judgement. Shares of the same company clearly are; two index funds tracking different indexes generally are not, but the IRS has not drawn a precise line.
The United Kingdom achieves a similar result with share-matching rules: shares bought back within 30 days of a sale are matched with that sale, which blocks the "bed and breakfasting" technique of selling and repurchasing to crystallise a loss.
Tax-loss harvesting
Tax-loss harvesting means deliberately selling investments that are below cost to realize losses that offset gains elsewhere, then reinvesting in a similar but not substantially identical holding to keep the portfolio's asset allocation intact. It is common late in the year and after market falls, such as during a bear market, and some robo-advisers automate it. The benefit is mainly a deferral: the replacement holding has a lower basis, so more gain will be taxed later, unless it is held until death or donated.
Special cases
- Worthless securities. A security that becomes completely worthless is treated as sold on the last day of the tax year in which it became worthless, as a result of a default or bankruptcy, for example.
- Fund losses stay inside the fund. A mutual fund cannot pass net capital losses through to shareholders; it carries them forward to offset its own future gains, which can reduce later capital gains distributions.
- Crypto. The IRS treats cryptocurrency as property, so losses on its sale are capital losses.
- Unrealized losses. Paper losses on held assets have no tax effect, though for banks large unrealized losses on securities portfolios can matter for solvency and confidence.
In the UK, capital losses must be reported to HMRC within four years of the end of the tax year in which they arose; they are set against gains of the same year and can then be carried forward without time limit, but they cannot generally be used against income.