What Is a Capital Loss? Deduction Rules Explained

A capital loss generally occurs when you sell or otherwise dispose of a capital asset for less than its adjusted basis after selling costs. A decline in value while you still own an asset is usually an unrealized loss and does not enter the tax return.

Capital losses can offset capital gains. If deductible net losses remain after the required netting, an individual may generally deduct up to $3,000 against other income each year, or $1,500 if married filing separately. The rest generally carries forward.

How a capital loss is calculated

Amount realized − adjusted basis = gain or loss

Suppose Alex sells an investment for $8,000, pays $100 of selling costs, and has $12,100 of adjusted basis:

$7,900 amount realized − $12,100 adjusted basis = ($4,200) capital loss

The original purchase amount may not equal adjusted basis. Reinvested distributions, stock splits, returns of capital, wash-sale adjustments, gifts, inherited property, and other events can change it.

Not every economic loss is deductible

Losses on investment capital assets can generally enter the capital-loss system. Losses on personal-use property — such as a personal car, furniture, or a main home sold at a loss — generally are not deductible. Business and rental property may produce ordinary, Section 1231, depreciation-recapture, or capital results depending on the facts.

A security that becomes completely worthless may be treated as sold on the last day of the tax year under special rules. A temporary decline, bankruptcy filing, or severely reduced value does not necessarily establish complete worthlessness.

How capital-loss netting works

Federal Schedule D generally follows this sequence:

1. Combine short-term gains and losses, including short-term carryovers.
2. Combine long-term gains and losses, including long-term carryovers.
3. Net a gain in one category against a loss in the other.
4. Report the resulting net gain or net loss.

Assume Alex has a $12,000 long-term gain, a $4,000 long-term loss, and a $13,000 short-term loss. The long-term category first nets to an $8,000 gain. That gain offsets $8,000 of the short-term loss, leaving a $5,000 net capital loss. Alex may generally deduct $3,000 against other income and carry $2,000 forward, assuming single filing status and no other limitations.

Capital-loss carryovers

Unused net capital loss generally carries to later years until absorbed. It retains short-term or long-term character. Carryovers can affect the value and timing of later gains, so prior Schedule D worksheets should be preserved even if the current brokerage statement shows no loss.

Carryovers belong to the taxpayer who sustained the loss. Marriage, divorce, death, residency changes, and filing-status changes can require special analysis. Corporations have different capital-loss rules and should not use the individual $3,000 rule.

Wash sales and tax-loss harvesting

Selling an investment to recognize a tax loss is often called tax-loss harvesting. The transaction still must make investment sense, and the wash-sale rule must be checked.

If substantially identical stock or securities are acquired within 30 days before or after the loss sale, some or all of the loss may be disallowed currently. A replacement purchase through automatic dividend reinvestment, another broker, a spouse, or an IRA can create a result that one broker does not report.

Where a capital loss is reported

Many investment dispositions are detailed on Form 8949. The form reconciles proceeds, basis, and adjustments such as wash-sale amounts. Totals flow to Schedule D, where short-term and long-term results, carryovers, and the allowable current-year loss are computed.

Form 1099-B may report proceeds, basis for covered shares, and a broker-detected wash sale. It does not replace the taxpayer's records. Transactions across accounts and corrections to incorrect basis may require adjustments.

Federal and California treatment

California also generally permits an individual net capital-loss deduction of up to $3,000, or $1,500 for married taxpayers or registered domestic partners filing separately. California taxes capital gains at ordinary rates rather than a separate preferential long-term rate.

Federal and California carryovers can differ when basis, prior-year residency, or state conformity differs. California Schedule D (540) includes its own capital-loss carryover computation. A taxpayer who moves into or out of California may need to restate and track losses under California sourcing and residency rules rather than copying the federal carryover.

Common mistakes

• Deducting an unrealized decline
• Claiming a personal-use loss
• Applying the $3,000 limit before offsetting gains
• Losing prior-year carryover worksheets
• Treating broker basis as automatically correct
• Ignoring wash sales across accounts
• Assuming a loss always offsets wages immediately
• Using federal carryover as the California amount without checking

Records to keep

Keep trade confirmations, Forms 1099-B, basis records, corporate-action notices, worthless-security evidence, prior Schedule D carryover worksheets, and statements from every account. Preserve documentation until the asset and every related carryover or adjustment is fully resolved.

Frequently asked questions

Related terms

• Capital Gain
• Capital Loss Carryover
• Wash Sale
• Tax-Loss Harvesting
• Cost Basis
• Holding Period
• Form 8949

Official sources

• IRS — Topic No. 409, Capital Gains and Losses
• IRS — Publication 550, Investment Income and Expenses
• IRS — 2025 Instructions for Schedule D
• California FTB — 2025 Schedule D (540) instructions
• California FTB — Publication 1100, Taxation of Nonresidents and Individuals Who Change Residency

The definitions and examples on this page are for informational purposes only and do not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.