A long-term loss is any loss sustained by an investment that has been held for a period longer than twelve consecutive months. The loss comes about when the asset must be sold at a price that is less than what the investor originally paid for the security. In many nations, tax laws make it possible to claim the loss for the tax period where the sale actually takes place.
In some countries, a long-term loss is realized when the sale price for the asset is below what is known as the adjusted purchase price. This figure represents not only the original purchase price, but also any other expenses that were incurred as part of the acquisition of the asset. For example, if the asset in question was a house, there would likely be additional expenses such as recording fees, escrow fees, and various types of fees for inspection of the property before the sale. All these additional expenses increase the investment that the buyer makes in the property, and are often accounted for when determining if the property is later sold at a profit or at a loss.
Investors tend to avoid long-term loss whenever possible. One strategy is to note and developing trends with securities that are held for more than one year. Should the value of a given stock begin to decrease incrementally, the investor will evaluate the market climate and determine what factors are driving down the price. If those factors can be reasonably expected to continue exerting an adverse effect on the security’s price, selling the asset before the original or adjusted price is reached will prevent incurring any type of loss.
There are situations when investors are willing to endure a long-term loss. Depending on the tax laws that apply, it may be possible to use the loss to offset gains made on other investments, a strategy that helps to lower the taxes due for the most recently closed tax period. At other times, the investor may be willing to undergo the loss if the asset price is projected to level out at a rate that is just below the adjusted purchase price, then jump to an impressive level within a reasonable period of time. With this approach, the investor sells the security at a loss and thus gets the benefit of the tax reduction. During the following period, the asset is repurchased just before the anticipated increase in value, allowing the investor to benefit from both the long-term loss and the repurchase of the asset at a later date.