Capital loss

A capital loss is what you book when you sell a capital asset for less than its cost basis. The loss only counts once the sale closes, so a paper decline on a position you still hold earns you nothing at tax time.

That single word, realized, does most of the work. The IRS taxes gains and allows deductions only on closed transactions, which is why the timing of a sale matters as much as the price. Sell in December and the loss lands this year.

Experienced investors don’t treat a capital loss as a failure. They treat it as an asset with a tax value — one that offsets capital gains, softens a rebalancing bill, and compounds quietly over a long holding period.

Key takeaways

• A capital loss is the shortfall when a capital asset sells below its cost basis.
• Losses offset same-bucket gains first, then the opposite bucket, then ordinary income.
• IRS Topic 409 caps the ordinary-income deduction at the lesser of $3,000, or $1,500 if married filing separately.
• Unused losses carry forward to later years, with no expiry date on the carryforward.
• Wash-sale rules disallow the loss if you rebuy the same or a substantially identical security within 30 days.

How it works

A capital loss triggers only when you sell below your cost basis. The IRS then sorts it by holding period and nets it against gains in the same bucket first, before any of it reaches your ordinary income.

Short-term losses, on assets held a year or less, hit short-term gains first. Those gains are taxed at ordinary income rates. Long-term losses, on assets held longer, meet long-term gains taxed at 0%, 15%, or 20%.

Spill over and the excess crosses into the other bucket. Whatever survives that netting shaves income off your return. IRS Topic 409 sets the ceiling: the lesser of $3,000, or $1,500 if you’re married filing separately.

Anything above that limit isn’t lost. Topic 409 puts it plainly: if your net capital loss is more than this limit, you can carry the loss forward to later years. IRS Publication 550 covers the carryforward mechanics.

Here is the netting order in one view, including the two cases filers miss most often.

The rate your long-term gains would otherwise face tells you what a long-term loss is actually worth. For the 2025 tax year, the IRS sets those thresholds by taxable income and filing status.

The wash-sale rule is the trap. Buy the same or a substantially identical security within 30 days before or after the sale and the loss is disallowed, folded into the new position’s basis instead.

Fidelity’s wash-sale guide maps the 61-day window around the trade date. The rule also reaches a spouse’s account and an IRA, which is where careful filers still get caught.

Cost basis tracking sits at the centre of all of it. Brokerages report basis and holding period on Form 1099-B for stocks and bonds — you reconcile that to Schedule D and Form 8949 at filing.

Examples

Capital losses show up in every asset class the IRS calls capital. A crypto exit below cost, a tech position dumped in a rebalancing sweep, an inherited rental closing under basis — each one produces a deduction you can put to work.

Work a simple case. You buy 500 shares at $40 in January 2023 and sell at $22 in November 2025, a realized loss of $9,000. Offset $4,000 of long-term gains, deduct $3,000 against income, carry $2,000 forward.

In 2022, a brutal year for digital assets, investors booked heavy offsets as Bitcoin slid from roughly $47,000 to $16,500. Harvesting through that drawdown parked losses against gains they hadn’t made yet.

Vanguard’s 2024 tax-loss harvesting research puts the payoff at roughly 0.47% to 1.27% of added annual after-tax return.

The range moves with your tax bracket and holding period. Vanguard’s title carries the wider argument, which is that a personalized approach beats a calendar-driven sweep applied to everybody the same way.

Asset allocation shifts also produce planned losses. An investor rotating out of an overweight small-cap sleeve in 2024 books realized losses on the way out while redeploying cash into large-cap positions.

Bond holders took real losses in 2022 as interest rates climbed and prices fell. Rebalancers who sold aging positions that year harvested those losses against equity gains — instead of letting them sit.

NerdWallet’s 10 rules of tax-loss harvesting is the checklist most DIY filers run each December. A loss you plan in January does nothing for last year’s bill.

Related terms

These terms sit closest to a capital loss without doing its job. They cover the gain side, the instruments that generate losses, the strategies that shape how often you take them, and the payouts taxed on a separate track.

• Capital Gains: the profit realized when a capital asset sells above its cost basis.
• Bond: a debt instrument whose price falls when rates rise, producing realized losses on sale.
• Interest Rate: the cost of borrowing that drives bond and equity valuations.
• Dividend: a cash or stock payout to shareholders, taxed separately from gains and losses.
• Asset Allocation: the portfolio mix across stocks, bonds, and cash that shapes loss exposure.
• Growth Investing: a strategy weighted toward high-multiple stocks with wider drawdown risk.
• Value Investing: a strategy leaning on undervalued assets, usually with steadier realized-loss patterns.

FAQ

Five questions come up more than any others when a loss is on the table. Each answer below tracks IRS guidance as it stands for the 2025 tax year, and each one is short enough to lift on its own.

What is a capital loss?

A capital loss is the shortfall when you sell a capital asset for less than you paid for it. It applies to stocks, bonds, real estate, crypto, and most investment property. Paper losses don’t count until the sale closes.

How much capital loss can you deduct against ordinary income?

IRS Topic 409 caps the deduction at the lesser of $3,000, or $1,500 if you’re married filing separately. Anything above that carries forward to later years, with no expiry and no cap on the amount carried.

What is the wash-sale rule?

The wash-sale rule disallows the loss if you repurchase the same or a substantially identical security within 30 days before or after the sale. The disallowed amount folds into the new position’s cost basis, so it is deferred rather than gone.

Are crypto capital losses treated the same as stock losses?

The IRS classifies most crypto as property, so crypto losses follow the same short-term and long-term treatment as stocks. The wash-sale rule does not currently apply to digital assets, though proposed legislation has repeatedly aimed to close that gap.

Does tax-loss harvesting work inside a 401(k) or IRA?

No, because gains and losses inside a 401(k) or an IRA aren’t taxed until distribution, so harvesting only pays off in a regular taxable account.

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