Capital Loss

A capital loss is what you have when an asset sells for less than its cost basis. Like a gain, it is only realized when you actually sell — a holding that is down on paper has no tax effect at all.

Losses net against gains in a set order. Short-term losses offset short-term gains first, long-term against long-term, and only then does any remainder cross over. Because short-term gains are taxed at your marginal rate rather than preferential long-term rates, a short-term loss usually shelters the more expensive kind of income.

If losses exceed gains for the year, up to $3,000 of the net loss can be deducted against ordinary income — wages included. Anything beyond that carries forward indefinitely and can be used in future years.

Deliberately realizing losses to capture that benefit is called tax-loss harvesting. The constraint is the wash-sale rule: buy the same or a substantially identical security within 30 days before or after the sale and the loss is disallowed, folded into the basis of the replacement instead.

None of this applies inside a 401(k) or IRA. Losses in a tax-advantaged account are not deductible, which makes harvesting purely a taxable-account tool.