CAPITAL LOSS
Back to GlossaryDefinition
The loss incurred when a capital asset decreases in value and is recognized with the asset is sold for a price lower than the original purchase.
Summary
A capital loss occurs when you sell an investment or asset for less money than you originally paid for it. Think of it like buying a stock for $100 and later selling it for $80 - you've experienced a $20 capital loss. This loss is only 'realized' (officially recognized for tax purposes) when you actually sell the asset, not while you still own it and its value has simply dropped on paper.
Usage Context
Understanding capital losses is crucial when studying investment analysis, tax planning, portfolio management, and financial decision-making. It's particularly important when learning about risk assessment and the potential downside of investments.
Common Confusions
- Confusing unrealized losses (paper losses) with actual capital losses that occur only upon sale
- Thinking all losses are capital losses when some may be ordinary business losses
- Not understanding that the loss is calculated from the original purchase price, not the highest value the asset ever reached
- Believing that capital losses automatically reduce regular income taxes dollar-for-dollar
