Written by James Chae — Co-Founder, Expert Sapiens
Reviewed March 2026
Tax
Definition
A capital loss occurs when you sell a capital asset (stock, real estate, crypto, business interest) for less than your cost basis — what you originally paid plus any improvements. Capital losses can offset capital gains dollar-for-dollar and, if losses exceed gains, up to $3,000 of ordinary income per year.
Capital losses are classified as short-term (asset held one year or less) or long-term (held more than one year). Short-term losses first offset short-term gains; long-term losses first offset long-term gains. Excess losses cross-apply: long-term losses can offset short-term gains and vice versa. If total capital losses exceed total capital gains, up to $3,000 of the net loss can be deducted against ordinary income annually. Any remaining losses carry forward to future tax years indefinitely. This carryforward can be valuable for investors with volatile portfolio years — large losses harvested in one year offset future gains. The wash sale rule prevents re-purchasing the same security within 30 days to maintain the loss deduction. Calculating the correct cost basis — especially for assets with multiple purchase lots, dividends reinvested, or stock splits — requires careful record-keeping.
Strategic capital loss harvesting can reduce your tax bill significantly in years with large gains — but requires careful planning around wash sale rules, holding periods, and carryforward optimization. A tax advisor can help you model the after-tax impact of selling positions and implement a harvesting strategy aligned with your investment goals.
Written by James Chae — Co-Founder, Expert Sapiens
Reviewed March 2026