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Simple English definitions for legal terms
capital loss
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A quick definition of capital loss:
A capital loss is when you lose money by selling something that you own, like a house or a stock. It happens when you sell it for less than what you paid for it. For example, if you bought a stock for $100 and sold it for $80, you would have a capital loss of $20. This can affect your taxes and how much money you owe. It's important to keep track of your capital gains and losses so you can report them correctly to the government.
A more thorough explanation:
A capital loss is a decrease in the value of a capital asset when it is sold or exchanged. It is the opposite of a capital gain, which is an increase in value. The amount of the loss is calculated by subtracting the selling price from the original cost of the asset.
For example, if you bought a stock for $1,000 and sold it for $800, you would have a capital loss of $200.
Capital losses can be used to offset capital gains for tax purposes. If you have more capital losses than gains in a year, you can use the excess losses to reduce your taxable income by up to $3,000. Any remaining losses can be carried forward to future years.
Other types of losses include:
- Actual loss: A loss resulting from the real and substantial destruction of insured property.
- Consequential loss: A loss arising from the results of damage rather than from the damage itself.
- Constructive total loss: Such serious damage to the insured property that the cost of repairs would exceed the value of the thing repaired.
- Hobby loss: A nondeductible loss arising from a personal hobby, as contrasted with an activity engaged in for profit.
These examples illustrate the definition of capital loss by showing how it is calculated and used for tax purposes. They also demonstrate other types of losses that may be encountered in different contexts.