Can I Deduct Short-Term Capital Losses?

Capital losses occur when you sell a capital asset (think stocks, bonds, or investment real estate) for less than what you bought it. The IRS does allow you to take that capital loss and apply it on a dollar-for-dollar basis against capital gains. The limit on this deduction is $3,000 (if married, filing jointly) or $1,500 (if you’re a single filer).

But how does a short-term capital loss apply to such gains?

Short Term, Defined

To answer this question, let’s define short-term capital loss. Similar to capital gains, capital losses are either short term or long term, based on the following:

• A short-term capital loss occurs with a capital asset you hold for less than one year
• A long-term capital loss occurs with a capital asset you hold for more than one year

When dealing with capital gains, a short-term capital gain is taxed as ordinary income. Meanwhile, a long-term capital gain is taxed at the capital gains rate. But using capital losses to offset gains is somewhat different.

Deducting Short-Term Capital Losses

While you can certainly use your short-term capital loss to offset any gain, there’s a certain order when it comes to doing so. Specifically, your short-term losses must first be used to offset any short-term gains (long-term losses offset long-term gains). Once short-term gains are offset, you can use that short-term loss against long-term gains. After that, you can use the short-term loss against ordinary income.

For example, let’s say you generate the following in the same year:

• $200 short-term loss and $500 short-term gain
• $1,000 long-term loss and $900 long-term gain

Here’s how you’d offset the above:

• You would first use the $200 short-term loss to offset the $500 long-term gain (leaving you with an overall gain of $300).
• You would then use the $1,000 long-term loss against the $900 long-term gain (leaving you with a net long-term loss of $100).
• You can then use the remaining $100 gain (long term) against the $300 (the remaining short-term loss). This means you would pay taxes on $200.

Remember that this amount is taxed at the ordinary income rate, as per the rules of short-term gains. Also remember that the overall amount you can deduct can’t exceed $3,000 in a tax year ($1,500 for single filers). These are carried over. 

Also remember to report that capital loss on Form 8949 when tax time rolls around. The amount you list on this form is then carried over to your Schedule D/Form 1040.

Multiple Numbers

If you’re dealing with only a couple of short-term losses and gains, the deduction process can be straightforward. This becomes more complex if you’re selling several capital assets at varying times—or if you’re participating in a tax loss harvesting strategy. As such, it’s a good idea to consult with your accountant for advice on deducting short-term capital losses.