To incur a capital loss is to have a negative profit after selling an investment asset such as stocks, bonds, mutual funds, real estate or other capital assets. A loss happens when the money received from selling the asset is less than the amount of money you paid to acquire the asset. If someone buys an asset for $100, and later sell that asset for $90, this person has lost $10.
Or to speak in a more general way, start with the selling price and subtract the original purchase price.
If the resulting answer is a positive number, you have a gain or profit. If the resulting answer is a negative number, you have a loss. Using the above example, 90 – 100 = – 10. Negative ten means we have a loss of ten dollars.
Capital Losses Offset Capital Gains at the Transaction Level
Let us suppose Andrew has sold two investments this past year. He buys one stock at $850, which he later sells for $1,000. Here, he has made a profit of $150. He also bought stock in another company at $800, which he later sold for $750. On this second investment Andrew lost $50. The loss on the second transaction is subtracted from the profits on the first transaction. Andrew's taxable income from these two transactions is 150 – 50 = $100. The $50 loss on the second investment sale has reduced or offset the profits on the first investment sale.
The loss on one transaction directly offsets the gain on the other transaction.
After combining these two transactions, the net result is the amount that is taxable income. We summarize Andrew's situation in the following table:
Example: How capital losses offset capital gains at the transaction level  
Description of property  Date acquired  Date sold  Proceeds  Cost or other basis  Gain or (loss) 
100 sh UVW  01/02/14  06/30/14  1,000  850  150 
50 sh XYZ  02/13/14  9/15/14  750  800  –50 
Net gain subject to tax 



 100 
Capital Losses Offset Capital Gains of the Same Holding Period
Now we need to be a little more precise. Income from capital gains are taxed at different rates, depending on how long the asset was owned. If the asset was owned for more than one year, this is called a longterm holding, and gains from such longterm investments are taxed at special rates of zero percent, 15% or 20%. Assets owned for one year or less are shortterm holdings, and gains from shortterm investments are taxed at the regular tax rates ranging from 15% to 39.6%.
Accordingly, we add together all the gains and losses of shortterm transactions to find the net amount of shortterm gain (or loss, if the amount of income is negative). Similarly, we add together all the gains and losses of longterm transactions to find the net amount of longterm gain (or loss, if the amount is negative).
We combine the above rule (about netting transactions together) with this rule (about keeping transactions separated into shortterm and longterm categories). Combined, the two rules fit together like this:
 Losses on shortterm transactions are subtracted from shortterm gains to result in a net amount of shortterm gain or loss.
 Losses on longterm transactions are subtracted from longterm gains to result in a net amount of longterm gain or loss.
Another way to phrase this: losses on shortterm investments reduce gains made on other shortterm investments. And similarly, losses on longterm investments reduce gains made on other longterm investments.
Let's continue the example from above. Now, Andrew has four transactions. Two have a shortterm holding period. And another two have a longterm holding period. We organize Andrew's data into the following table:
Example: How capital losses offset capital gains of the same holding period  
Description of property  Date acquired  Date sold  Proceeds  Cost or other basis  Gain or (loss) 
100 sh UVW  01/02/14  06/30/14  1,000  850  150 
50 sh XYZ  02/13/14  9/15/14  750  800  –50 
Net shortterm gain subject to tax  100  






200 sh QRST  01/02/12  7/14/14  10,000  15,000  –5,000 
350 sh MNOP  02/28/12  11/20/14  20,000  11,000  9,000 
Net longterm gains subject to tax  4,000 
Overall Capital Losses
When your shortterm gains or losses plus your longterm gains or losses, when added up, result in a loss, then you have an overall loss that can be deducted against your other income.
 "Net loss. If the total of your capital losses is more than the total of your capital gains, the difference is deductible. But there are limits on how much loss you can deduct and when you can deduct it" (IRS.gov, Publication 544).
Example 1:
 Net short term gain: $1,000
 Net longterm loss: – 500.
Here, the longterm loss reduces the shortterm gain, and the person is taxed only on $500 of positive income.
Example 2:
 Net shortterm loss: – $2,000
 Net longterm gain: $3,500
Here, the shortterm loss reduces the longterm gain, and the person is taxed only on $1,500 of positive income.
Example 3:
 Net shortterm loss: –$2,000
 Net longterm loss: –$2,000
Here, the shortterm loss and the longterm loss combine to an overall loss of $4,000. This amount can reduce a person's other income on their tax return. The amount of the overall loss that can be used to reduce other income is limited to a maximum amount, however.
Limitations on Overall Net Losses
We can deduct up to $3,000 per year in net capital losses. If net losses exceed this amount, then $3,000 of the loss is deducted against other income, and the remainder amount carries over to the following year. This $3,000 limit applies to people using the single, head of household, married filing jointly and qualifying widow/widower status. Married people filing separately are limited to $1,500 per person on their net capital losses.
 "If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return)" (IRS.gov, Publication 544).
Let's continue the example from above. Let's say Andrew now has five transactions, as follows:
Example: How overall net losses work  
Description of property  Date acquired  Date sold  Proceeds  Cost or other basis  Gain or (loss) 
100 sh UVW  01/02/14  06/30/14  1,000  850  150 
50 sh XYZ  02/13/14  9/15/14  750  800  –50 
Net shortterm gain or loss  100  






200 sh QRST  01/02/12  7/14/14  10,000  15,000  –5,000 
350 sh MNOP  02/28/12  11/20/14  20,000  11,000  9,000 
400 sh IJKL  03/15/12  12/28/14  5,000  13,000  –8,000 
Net longterm gain or loss  –4,000  
Overall net capital loss (shortterm gain + longterm loss)  –3,900  
Amount deductible against other income this year  3,000  
Amount of capital loss carried over to next year  –900 
Carryover Losses Retain Their Character as ShortTerm or LongTerm
 "… When you carry over a loss, it retains its original character as either long term or short term. A shortterm loss you carry over to the next tax year is added to shortterm losses occurring in that year. A longterm loss you carry over to the next tax year is added to longterm losses occurring in that year. A longterm capital loss you carry over to the next year reduces that year's longterm gains before its shortterm gains."
 "If you have both shortterm and longterm losses, your shortterm losses are used first against your allowable capital loss deduction. If, after using your shortterm losses, you have not reached the limit on the capital loss deduction, use your longterm losses until you reach the limit." (IRS.gov, Publication 544)
Wash Sale Rule
Whenever a person buys substantially identical stock or securities within 30 days before or after selling stock at a loss, then the losses are suspended under the wash sale rule.
Suppose I sell stock in XYZ company at a loss on March 31st. If I buy the stock in XYZ company 30 days before to 30 days after March 31st, then I have a wash sale situation. For a March 31st selling date, that means my wash sale period runs from March 1st (thirty days before) to April 30th (thirty days after). If I were to buy XYZ stock during this time frame, I would not be able to claim the full amount of the loss from the March 31st sale. Instead, I would take the loss amount and add it to my cost basis in the new shares I purchased.
Further Reading
 Capital Gains: An Overview
 Capital Gains When Selling a Home
 Capital Gains When a House is Foreclosed
 Wash Sale Rule
 Publication 544, Sales and Other Dispositions of Assets
 Publication 550, Investment Income and Expenses
 Ten Facts That You Should Know about Capital Gains and Losses