Common Capital Loss

• Probably the most common type of capital loss taxpayers report on their returns is the result of selling stocks, corporate bonds, mutual funds and other similar types of financial investments. However, you cannot deduct the capital losses you incur on capital assets you hold for personal use, such as your home or car. Regardless of the type of investment, you calculate the capital loss in the same way. Suppose you purchase a stock for $20 and sell it when it's trading at $15. The result of your transaction is a $5 capital loss that you can use to reduce capital gains, or possibly deduct against other income. After calculating your loss, it's important to determine whether you should classify it as short-term or long-term.
  
  

Short-Term Capital Loss

• Your deductible short-term capital losses are those assets you own for one year or less. If you purchase the share of stock on Sept. 20, 2010 and sell it on June 20, 2011, then you must treat it as a short-term loss. The significance is that these losses can offset any of your other short-term gains first, with the excess able to reduce your taxable long-term gains. If you have no other long-term gains, then you can deduct up to $3,000 of the loss per year against your other income until the loss is fully deducted.
  
  

Long-Term Capital Loss

• When you hold the stock for more than one year, then your $5 loss is a long-term capital loss. You first net your long-term capital losses with any long-term capital gains. If these losses exceed the gains, then you can use the excess loss to reduce your taxable short-term capital gains. If it exceeds your short-term capital gains, the losses are also deductible up to $3,000 per year with the remaining amounts deductible in future years subject to the same annual limitations.
  
  

Deducting Capital Losses

• If you plan on deducting any of your capital losses, then you must prepare a Schedule D to report the transactions that result in the loss. If you doubt you can deduct the loss in the year you sell the stock or other investment, you should still prepare a Schedule D so that you can deduct it in future years or net it against future short-term and long-term capital gains. The Schedule D generally requires you to report the price you pay for the asset, the date of sale and the sale proceeds.