Legal Definitions - long-term capital loss

A long-term capital loss occurs when an investment asset, which has been owned for more than one year, is sold for less than its original purchase price. This type of loss is distinct from a short-term capital loss, which involves assets held for one year or less. For tax purposes, long-term capital losses can often be used to offset long-term capital gains, and potentially a limited amount of ordinary income.

Here are some examples to illustrate this concept:

• Example 1: Stock Investment

  Imagine an individual, Sarah, purchased 500 shares of Company A stock for $100 per share, totaling $50,000, two and a half years ago. Recently, due to unexpected market volatility, the stock's value declined significantly. Sarah decides to sell all her shares for $70 per share, receiving $35,000.

  Explanation: Sarah held the stock for more than one year (two and a half years), making it a "long-term" asset. She sold it for $35,000, which is less than her original purchase price of $50,000. The difference of $15,000 ($50,000 - $35,000) represents a long-term capital loss.

• Example 2: Rental Property Sale

  A couple, David and Maria, bought a small rental condominium five years ago for $250,000. After several years of renting it out, they decided to sell it. Due to a downturn in the local real estate market and some necessary repairs, they were only able to sell the property for $220,000.

  Explanation: The rental condominium is an investment asset that David and Maria owned for five years, qualifying it as "long-term." They sold it for $220,000, which is less than their purchase price of $250,000. The resulting $30,000 difference ($250,000 - $220,000) is considered a long-term capital loss.

• Example 3: Collectible Art Investment

  An art collector, Mr. Chen, purchased a painting by an emerging artist for $15,000 four years ago, hoping its value would appreciate. After holding it for several years, the artist's popularity waned, and Mr. Chen decided to sell the painting at auction. It sold for $12,000.

  Explanation: The painting is a collectible investment asset that Mr. Chen owned for four years, making it "long-term." He sold it for $12,000, which is less than the $15,000 he paid for it. This $3,000 difference ($15,000 - $12,000) is a long-term capital loss.