Definition of Short-Term Capital Loss
You can experience a short-term capital loss in many different ways, such as through investments in stocks and even through the purchase of real estate. There is a chance of gaining monetary value on these purchases, but there is also the risk of losing. A short-term capital loss can have a substantial effect on your income taxes and should be handled appropriately. Therefore, it is best to understand the basics of a short-term capital loss.
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Summary
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According to the "Dictionary of Financial Terms," a capital loss is when you sell an asset for less than what you paid for it. The monetary loss you experience is referred to as capital loss. An example of capital loss would be purchasing 10 shares of stock at $10 a share and then selling the same stock for $5 a share. Here you would be losing $5 on each stock sold and your capital loss would be $50.
Identification
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The determination of whether the capital loss is short-term or long-term comes with the length of time you hold on to the investment. In most cases, if you sell an investment within one year, this investment is considered a short-term investment. Therefore, if you experience a loss on the selling of your short-term investment, you will have a short-term capital loss. Any investment sold after a year and a day is considered a long-term investment and will be considered a long-term gain or long-term loss, depending on the situation.
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Effects
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There is importance in determining if you have had a short-term capital loss or a long-term capital loss during a tax year. This will determine the amount of taxes you will be required to pay. In some cases, your short-term capital loss can be used to offset your short-term capital gains. The same is true for long-term capital loss and gains.
Benefits
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A short-term capital loss can be beneficial when it is time to do your taxes. Initially, a short-term capital loss may seem like a setback, but there is an upside to it. When tallying up your income tax, you can subtract your short-term capital loss from your short-term capital gain, decreasing your short-term capital gain and the amount of taxes you are required to pay on it.
Warning
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When computing your short-term capital loss and long-term capital loss into your income taxes, remember to keep them separate. You can only use your short-term capital loss to offset your short-term capital gain and your long-term capital loss to offset your long-term capital gain. You cannot use your short-term capital loss to offset your long-term capital gain and vice versa.
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