======capital_loss======
A capital loss is the financial world’s version of a sad trombone sound. It occurs when you sell a capital [[asset]]—like a [[stock]], [[bond]], or piece of [[real estate]]—for a price lower than what you originally paid for it. This original purchase price, including any commissions or fees, is known as your [[cost basis]]. A capital loss is the direct, less cheerful opposite of a [[capital gain]], which happens when you sell an asset for a profit. It’s crucial to remember that a loss isn't "real" in the eyes of the taxman until you actually sell the asset. If your favorite stock's price plummets but you hold on, you have an //unrealized// loss, which is essentially just a number on your screen. Once you hit the "sell" button and lock in that lower price, the loss becomes //realized//, and that’s when it starts to have real-world implications, particularly for your taxes.
===== So, How Exactly Is a Capital Loss? =====
At its heart, a capital loss is simple arithmetic. It's the difference between what you sold an asset for (the sale price) and what you paid for it (the cost basis).
The formula is: **Sale Price - Cost Basis = Capital Loss** (if the result is negative)
For example, let's say you bought 10 shares of "Innovate Corp." at $50 per share, making your total cost basis $500 (10 shares x $50/share). A year later, you sell all 10 shares at $30 per share, receiving $300.
Your capital loss would be: $300 (Sale Price) - $500 (Cost Basis) = -$200. You have a realized capital loss of $200.
===== Not All Losses Are Created Equal =====
Tax authorities, like the IRS in the United States, care a lot about //how long// you owned the asset before selling it. This distinction splits capital losses into two main categories, which affects how they can be used to offset gains.
==== Short-Term vs. Long-Term ====
  * **Short-Term Capital Loss:** This results from selling an asset you've held for **one year or less**.
  * **Long-Term Capital Loss:** This results from selling an asset you've held for **more than one year**.
Why the difference? Generally, tax rules encourage long-term investment. Short-term losses are first used to offset short-term gains, and long-term losses are first used to offset long-term gains. This matters because short-term gains are typically taxed at higher rates (your ordinary income tax rate) than long-term gains.
===== The Silver Lining: Turning a Loss into a Win =====
While nobody enjoys seeing their investments drop in value, a realized capital loss can be a surprisingly useful tool. With a bit of strategy, you can use your losses to lower your tax bill.
==== Introducing Tax-Loss Harvesting ====
This powerful strategy is called [[tax-loss harvesting]]. It involves intentionally selling investments at a loss to offset the taxes you would otherwise owe on your capital gains.
Think of it this way:
  - **Step 1:** You sell Stock A and realize a $2,000 capital gain. Uh oh, tax bill looming.
  - **Step 2:** You notice that your investment in Fund B is down by $2,000. It's an unrealized loss.
  - **Step 3:** You sell Fund B, "harvesting" that $2,000 loss.
  - **Step 4:** You use the $2,000 loss from Fund B to cancel out the $2,000 gain from Stock A. Your net capital gain is now $0, and the tax bill on that gain vanishes.
If your total capital losses exceed your total capital gains for the year, you can often deduct a portion of the excess loss against your regular income (in the U.S., this is typically limited to $3,000 per year). Any remaining loss can be carried forward to future years.
==== Watch Out for the Wash Sale Rule! ====
Before you start selling all your losers, you must know about the [[wash sale rule]]. This rule prevents investors from selling a security at a loss and then immediately buying it back just to claim the tax benefit while essentially keeping their original investment position.
In the U.S., a wash sale occurs if you sell a security at a loss and then buy the same or a "substantially identical" security within **30 days before or after the sale** (a 61-day window in total). If you trigger this rule, the IRS will not allow you to claim the capital loss for tax purposes in that year.
===== A Value Investor's Perspective on Losses =====
For a follower of [[value investing]], a capital loss is more than just a number—it’s a test of discipline and perspective. The philosophy, pioneered by figures like [[Benjamin Graham]], teaches us to distinguish between a company’s price and its intrinsic value.
Graham introduced us to his famous allegorical business partner, [[Mr. Market]], who is prone to wild mood swings. On some days, he offers to buy your shares for a ridiculously high price (creating a potential capital gain), and on others, he panics and offers to sell you more shares at a ridiculously low price (creating an unrealized capital loss on your existing holdings).
A value investor understands that a paper loss created by Mr. Market's pessimism doesn't mean the underlying business is broken. In fact, if the company's long-term prospects remain strong, a lower price can be a fantastic opportunity to buy more of a great business on sale. The key is to react with your calculator, not your emotions, and to remember that a realized capital loss is a tool, not necessarily a sign of failure.