Capital Loss

A capital loss is a decrease in the value of an asset below its purchase price. Capital loss reduces a taxpayer's income tax. If you've held the asset more than one year, the capital loss is long-term; if you've held it for one year or less, it's a short-term capital loss. A capital loss is realized once the capital asset is sold at a loss; until the asset is sold, the capital loss is unrealized. Once the capital loss is realized, it will go to reduce a taxpayer's capital gains tax. If the capital loss is greater than the IRS preset limit (i.e: $3,000 in 2007), the capital loss over such IRS preset limit (i.e. carryover capital loss) can be carried to the next tax year. Note that if the carryover capital loss is a short-term capital loss, it will go to offset a short-term gain in the next tax year, not a long-term gain, and vice-versa.