Legal Definitions - capital loss

A capital loss occurs when an investment asset, such as stocks, bonds, real estate, or other property, is sold for a price lower than its original purchase price or its adjusted cost basis. This loss can often be used to reduce capital gains or, to a limited extent, ordinary income for tax purposes.

Here are some examples to illustrate this concept:

• Example 1: Stock Market Investment

  Sarah purchased 100 shares of Tech Innovations Inc. stock for $50 per share, totaling $5,000. A year later, due to a downturn in the tech sector, the stock's value dropped significantly. Sarah decided to sell all her shares when the price was $35 per share, receiving $3,500. In this scenario, Sarah experienced a capital loss of $1,500 ($5,000 original cost - $3,500 sale price).

• Example 2: Investment Property Sale

  David bought a rental condominium as an investment for $300,000. After several years, he decided to sell it. However, the local real estate market had softened, and he was only able to sell the property for $280,000. David incurred a capital loss of $20,000 on the sale of his investment property.

• Example 3: Collectible Asset

  Maria, an art collector, purchased a rare painting for $75,000, hoping its value would appreciate. Five years later, she needed to sell the painting due to unforeseen circumstances. Unfortunately, the artist's popularity had waned, and she could only find a buyer willing to pay $60,000 for it. Maria realized a capital loss of $15,000 from the sale of her collectible asset.