What Is a Short-Term Loss?

A short-term los🥀s is when you sell something for less than you bought itꩵ for a year or less after you bought it.

You can take a tax deduction for a short-term loss with certain assets (e.g. stocks, bonds, 澳洲幸运5官方开奖结果体彩网:real estate investments), but not others—that is, those that are for personal use, like a 澳洲幸运5官方开奖结果体彩网:principal residence or a personal automobile.

How Short-Term Losses Work

When you sell something, you can end up with a gain or a loss. If the sale price is greater than the original 澳洲幸运5官方开奖结果体彩网:purchase price, you end up with a gain. A loss results if the sale price is lower than the original price. Losses (and gains) can be long-term or short-term, where the former is realized on assets held for 12 months or more, while the latter is realized for assets held for 12 months or less.

Certain losses are tax-澳洲幸运5官方开奖结果体彩网:deductible. As noted above, you cannot claim deductions on losses for personal property, such as your primary residence or vehicles. But you can on other assets like investments, including stocks, bonds, and real estate investments. These are known as short-term capital losses. You can calculate and declare all short-term losses (and gains) on Part II of the Internal Revenue Service (IRS) 澳洲幸运5官方开奖结果体彩网:Schedule D form. This means:

• If a taxpayer has long-term 澳洲幸运5官方开奖结果体彩网:capital gains and losses for the year, the long-term losses must be offset against the long-term gains.
• Then any short-term losses can offset long-term gains, or vice versa.
• Net losses of either type can then be deducted from the other kind of gain.

If the net result of these offsetting calculations is a loss, the taxpayer can deduct up to $3,000 of the net capital loss against 澳洲幸运5官方开奖结果体彩网:ordinary income for the year. A net loss in excess of $3,000 (or $1,500 for those married filing separately) must be deferred until the following year.

For example, if a taxpayer realizes a net 澳洲幸运5官方开奖结果体彩网:capital loss of $10,000 in 2024, $3,000 of the loss can be deducted in calculating the taxpayer’s tax liability for that year, which is the year of the loss. The remaining $7,000 of losses can be carried forward. Assuming no additional capital gains or losses, the taxpayer can deduct $3,000 of the losses in each of the next two years, 2025 and 2026, and can deduct the final $1,000 in 2026, the third year following the 澳洲幸运5官方开奖结果体彩网:sale of the assets.

Special Considerations

An unrealized short-term loss refers to the decline in the value of an asset held by a taxpayer for a year or less to an amount below its adjusted tax basis.

An asset’s adjusted tax basis is its total acquisition cost (the purchase price plus related costs such as taxes and commissions) increased by the cost of any improvements and reduced by cost recovery deductions. This may come in the form of 澳洲幸运5官方开奖结果体彩网:depreciation or 澳洲幸运5官方开奖结果体彩网:amortization, if any, claimed in determining income tax liability.

Net capital losses, whether short-term or long-term, are limited to a maximum deduction of $3,000 per year, which can be used against earnings or other 澳洲幸运5官方开奖结果体彩网:ordinary income.

Short-Term Loss vs. Long-Term Loss

As noted above, losses can be deemed short-term or long-term. Remember, a short-term loss is one that occurs on the sale or 澳洲幸运5官方开奖结果体彩网:disposition of a 澳洲幸运5官方开奖结果体彩网:capital asset that’s held for 12 months or less. A 澳洲幸运5官方开奖结果体彩网:long-term loss, on the o🌠ther hand, occurs when there’s a loss on a capital asset that is held for 12 months or more.

Taking short-term losses offers a greater 澳洲幸运5官方开奖结果体彩网:tax benefit compared to long-term losses to investors. That’s because they are used to offset any short-term gains you may have from the sale of your capital assets. These gains are taxed at a higher rate than others.

Examples of Short-Term Losses

Capital losses can produce tax savings in addition to offsetting capital gains and eliminating the tax 澳洲幸运5官方开奖结果体彩网:liabilities associated with them. So if you have $1,000 as a short-term loss and $500 as a short-term gain, the net $500 short-term loss can be deducted against your net long-term gain, should you have one. If you have less than🦩 $500 of net long🃏-term gain, the unused excess capital loss can be deducted from ordinary income and thus can wipe out the tax liability on the $500 of ordinary income.

For most 澳洲幸运5官方开奖结果体彩网:taxpayers, the tax savings on long-term capital gains that are offset is either zero or 15% of the gain; for higher-income taxpayers, the savings are 20% of the gain. However, 澳洲幸运5官方开奖结果体彩网:tax deductions for losses offsetting up to $3,000 of ordinary income for a year can result in greater savings for taxpayers whose income falls into the income tax brackets 🐻between 22% and 37%.

If you have an overall net capital loss for a year, you can deduct up to $3,000 of that loss against ordinary income, such as your salary and interest income. If your 澳洲幸运5官方开奖结果体彩网:marginal tax rate is 22%, a $3,000 deduction from ordinary income will reduce your tax bill🅠 for the year by $660 (that is, $3,000 x .22). That savings changes to $1,110 if the marginal rate is 37% (that i🌄s, $3,000 x .37).

Because of 澳洲幸运5官方开奖结果体彩网:progressive tax rates, the higher your marginal tax rate, the greater the tax savings from such deductions. Taxpayers can carry over any unused excess net capital loss to subsequent years and deduct the excess in the later years. As noted above, when you’re married and filing separate returns, the annual net capital loss deduction limit against ordinary income is $1,500.

The Bottom Line

All capital losses, including short-term capital losses, can provide taxpayers with tax savings deductions, subject to the tax code’s rules for offsetting calculations and its ceilings on deductions against ordinary income. The calculation of the deductible amount of short-term losses for a year requires netting su🤪ch losses first against short-term gains and then against net long-term capital gains—if any.

If unused capital losses remain, a maximum of $3,000 of net capital losses, w𝓰hether short-term or long-term, can be deducted annually to reduce ordinary income. However, married taxpayers who file separate tax returns are subject to an annual ceiling of $1,500 for such losses. Any unused capital losses in excess of the applicable ceiling can be us🐭ed in future years.

Taxpayers should be aware that losses on some capital assets are not deductible. They can claim deductions for capital losses, whether short-term or long-term, on the sale or other taxable disposition of investment assets held for a year or less. But losses on assets held for personal use, such as a residence or automobile, are not deductible.