Capital Loss

Understanding 'Capital Loss'

In the world of trading, the term Capital Loss is one you will encounter often. It is vital to understand this concept to gauge the financial health of your investments. Simply put, a Capital Loss occurs when you sell an asset for less than what you paid for it.

Breaking Down Capital Loss

Capital Loss is the opposite of ‘Capital Gain,’ which is when you sell an asset for more than its purchased price. For instance, if you buy a stock for $100, and later sell it for $80, your Capital Loss is $20.

Why Capital Loss is Important in Trading

Capital Loss plays a key role in trading. It directly impacts your profit margins and tax liabilities. For tax purposes, Capital Loss can offset your capital gains, reducing the amount of tax you need to pay.

Capital Loss: Short-term vs. Long-term

Capital Losses can be short-term or long-term, depending on how long you held the asset before selling it. If you owned the asset for more than a year, it is a long-term Capital Loss; if less than a year, it is a short-term Capital Loss.

Calculating Capital Loss

To calculate your Capital Loss, subtract the selling price of the asset from its purchase price. The resulting number is your loss. If it is a positive number, you have a Capital Gain; if it is a negative number, you have a Capital Loss.

Dealing with Capital Loss

Having a Capital Loss is not the end of the world. Smart traders use it as an opportunity to learn and adjust their trading strategies. It is also an opportunity to decrease your tax liability through Capital Loss deduction. However, you should consult your tax advisor before making any tax-related decisions.