What is a Capital Loss?

The capital loss is commonly understood to be the difference between the purchase price of an asset and the price that the investor ultimately sells that same asset. In instances when the sale price is less than the purchase price, the investor realizes a negative return on the investment. That negative figure is identified as a capital loss.

Experiencing a capital loss on any investment is not something that an investor looks forward to dealing with. However, capital losses do not necessarily have to be a negative factor. Because taxes are accrued on the cumulative amount of capital gains during a given period, having a capital loss on one asset may in fact help to offset the amount of capital gain that was realized on other investments. The result of this scenario is less tax to pay on current assets, which is a desirable situation.

It is not unusual for any asset to go through a decrease in value from time to time. Many investors understand that many factors can impact the current worth of any stock option, and are prepared to hold on to an investment. This is especially true if the anticipation is that the stock will rise again after going through a temporary slump. In fact, many investments do eventually recover and go on to generated some value above and beyond the initial purchase price. However, an investor should always be prepared to deal with a capital loss.

Once it is become apparent that there is little to no chance of an upswing in the value of the asset, many investors will choose to sell the option rather than incur any further growth to the capital loss. In some cases, the investor may hold on to the asset just long enough to get the most benefit from the impact of the capital loss on overall capital gains, then unload the stock as quickly as possible.