U.S. Individual Capital Loss Deduction

U.S. Individual Capital Loss Deduction


When a person sells a capital asset, the sale normally results in a capital gain or loss. Is capital loss deductible in taxpayer’s income tax return? The following will give you a brief introduction to capital loss deductions rule.


Firstly, we should figure out some basic concepts. A capital asset includes inherited property or property someone owns for personal use (e.g. cars and home) or as an investment (e.g. stocks and bonds). A capital gain or loss is the difference between the basis and the amount the seller gets when they sell an asset. The basis is usually what the seller paid for the asset. But please note that taxpayers can only deduct capital losses on the sale of investment property but cannot deduct losses on the sale of property they hold for their personal use.


Capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term “net long-term capital gain” means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years.

The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year.


If your capital losses exceed your capital gains, individual taxpayers realizing a net long-term or short-term capital loss may only recognize (deduct) a maximum of $3,000 of the loss from other types of gross income (ordinary income passive income, or portfolio income). A joint return of husband and wife is treated as one person. If the husband and wife file income tax return separately, the loss deduction is limited to half ($1,500).


Excess net capital loss can be carried forward an unlimited time until exhausted. It maintains its character as long-term capital loss in future year.