Capital Loss
A capital loss occurs when you sell an asset for less than its cost basis (purchase price plus adjustments). Capital losses can offset capital gains dollar-for-dollar, and up to $3,000 of net losses can be deducted against ordinary income per year. Unused losses carry forward indefinitely.
Sold ETF for $15,000; cost basis $22,000 → capital loss of $7,000. Offsets $7,000 of capital gains, or $3,000/year of ordinary income with $4,000 carried forward.
Capital losses are the mirror image of capital gains. If you sell stock for $8,000 that you bought for $12,000, you have a $4,000 capital loss. Use that loss to offset $4,000 of capital gains — eliminating the tax on those gains entirely.
If losses exceed gains, up to $3,000 of net losses can be deducted from ordinary income (W-2 wages, etc.) each year. Remaining losses carry forward to future years with no expiration.
Tax-loss harvesting is the deliberate strategy of selling losers to generate deductible losses while staying invested in similar (but not identical) assets. The IRS wash-sale rule prevents you from claiming a loss if you buy a "substantially identical" security within 30 days before or after the sale.
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- Capital Gains
- A capital gain is the profit from selling an asset (stock, real estate, crypto, etc.) for more than you paid. In most countries, capital gains are taxed differently from ordinary income.
- Tax-Loss Harvesting
- Tax-loss harvesting is the practice of selling investments at a loss to offset capital gains, reducing your tax bill. The proceeds are reinvested in a similar (but not identical) asset to maintain market exposure.
- Cost Basis
- Cost basis is the original value or purchase price of an asset for tax purposes. Capital gains tax is calculated on the difference between the sale price and the cost basis.
- Dividend
- A dividend is a cash payment made by a company to its shareholders, typically quarterly, as a distribution of profits. Dividends provide income without selling shares and are common among mature, profitable companies.