What Are Short-Term Capital Losses?

Losing money can be part of investing, particularly when markets decline or individual investments perform poorly. A short-term capital loss generally occurs when you sell a capital asset for less than its adjusted basis after holding it for one year or less. These losses factor in when calculating your overall capital gain or loss for the year. After netting gains and losses, short-term capital losses may provide a tax benefit.

Consider working with a financial advisor if you’re wondering how a short-term capital loss can help your finances.

What Are Short-Term Capital Losses?

Short-term capital losses occur when you sell an investment for less than its adjusted basis after holding it for one year or less. For example, suppose you purchase stock for $400 and sell it six months later for $250. Assuming there are no other basis adjustments, you would have a $150 short-term capital loss.

A decline in an investment’s market value alone does not generally produce a deductible capital loss. Instead, you generally realize the loss when you sell or otherwise dispose of the asset. If you continue holding an investment after its price falls, the decline remains unrealized.

How Are Short-Term Capital Losses Determined?

You generally calculate your net short-term capital gain or loss by combining short-term gains and losses for the year, along with any applicable losses carried forward from earlier years. For example, suppose you realize a $1,500 short-term gain on one investment and a $2,000 short-term loss on another. Your net short-term capital loss would be $500.

That short-term result does not immediately determine how much you can deduct against other income. You calculate short-term and long-term gains and losses separately, and then combine them. When that calculation produces an overall capital loss, part of the amount may be deductible against income other than capital gains. For most taxpayers, the deduction cannot exceed $3,000 in a year, or $1,500 for married taxpayers filing separately. Remaining losses may carry over for use in subsequent tax years.

Short-Term Capital Losses vs. Long-Term Capital Losses

The primary distinction between short-term and long-term capital losses is the holding period. A gain or loss on an investment held for one year or less is generally short-term. One involving an investment held for more than one year is generally long-term.

The distinction also matters because short-term and long-term capital gains can receive different federal tax treatment. Net short-term capital gains generally receive the same federal tax treatment as ordinary taxable income. Net long-term capital gains can be subject to separate capital gains rates, although certain assets can receive different tax treatment.

How Short-Term Capital Losses Offset Capital Gains

Short-term capital losses can be particularly useful when you also have short-term capital gains. The IRS generally requires you to calculate your net result within each holding-period category first. Short-term gains and losses are combined, while long-term gains and losses are calculated separately.

For example, suppose you realize a $10,000 short-term gain and a $6,000 short-term loss during the same year. You would have a $4,000 net short-term capital gain before accounting for your long-term transactions.

You’d then combine your net short-term result with your net long-term result to determine your overall capital gain or loss. If losses remain after that calculation, you can use some of the amount to reduce other taxable income. Most taxpayers can use no more than $3,000 for this purpose in a single year ($1,500 for married taxpayers filing separately). It’s typically possible to carry the balance forward.

Investors should also consider the wash-sale rule when disposing of securities at a loss. The rule can prevent you from recognizing a loss when you acquire substantially identical securities during the period beginning 30 days before the sale and ending 30 days afterward. In many cases, the unrecognized loss increases the basis of the replacement securities, delaying the tax benefit. Different treatment applies when the replacement securities are acquired in an IRA or Roth IRA.

Reporting Short-Term Capital Losses on Your Tax Return

You can generally report short-term capital losses by following these steps:

Collect records of your investment transactions. Depending on the transaction, you may receive forms, such as Form 1099-B from a broker or Form 1099-S for certain real estate transactions.
Separate short-term and long-term transactions. You’ll generally use Form 8949 to report sales and exchanges of capital assets, reporting short-term transactions separately from long-term transactions.
Calculate the results on Schedule D of Form 1040. For example, $500 of short-term losses combined with $100 of short-term gains would produce a $400 net short-term loss before considering long-term transactions.

Schedule D then combines the net short-term and net long-term results. This determines your overall capital gain or loss for the year.

How to Use Short-Term Capital Losses to Offset Gains or Income

The tax calculation applies capital losses against capital gains before determining whether a remaining loss can reduce other taxable income. For example, suppose the final calculation leaves you with a $5,000 net capital loss. You could generally apply up to $3,000 against other income for that tax year, with any unused portion potentially available in a later year.

This treatment can make losses useful for tax planning, particularly when an investor has realized taxable gains elsewhere in a portfolio. However, tax considerations are only one factor when deciding whether to sell an investment.

Deduction and Carryover of Loss Limits

A net capital loss that remains after accounting for any gains can provide a deduction against other income, subject to an annual ceiling. For most individual filers, that ceiling is $3,000. The limit for married taxpayers who file separate returns is $1,500. Taxpayers can generally carry forward any unused balance into a later year.

For example, suppose you have a $10,000 net capital loss and no capital gains. Assuming the full annual deduction is available, you could generally deduct $3,000 against other income in the first year and carry the unused loss forward. The amount deductible in later years would depend on your capital gains, losses and other applicable tax rules in those years.

Capital loss carryovers also retain their character. A short-term loss carried into a future year remains short-term, while a long-term loss remains long-term.

Bottom Line

Short-term capital losses generally result from selling capital assets for less than their adjusted basis after holding them for one year or less. They are included with your other capital transactions when determining the year’s net result. When the calculation produces a net capital loss, federal tax rules may allow part of it to reduce other taxable income. Any unused balance can potentially apply to future tax years.

Tips for Short-Term Capital Losses

Trading assets can complicate your tax returns and it’s not always clear which forms to fill out or which numbers to use. If you’d rather leave that to a professional, a financial advisor can help. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use our capital gains tax calculator to see how much you owe for your investments this year.
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