long-term_capital_loss [CapiPedia]

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======Long-Term Capital Loss======
A Long-Term Capital Loss is the financial boo-boo that occurs when you sell an //investment// for less than your original purchase price, provided you've held onto it for a significant period—typically more than one year in the United States. Think of it as the sad sibling of a [[long-term capital gain]]. It's crucial to remember that this loss isn't "real" in the eyes of the tax authorities until you actually sell the asset. Until that point, if your stock is down but you haven't sold it, you simply have an //unrealized loss//—a paper loss that stings your pride but doesn't yet have tax implications. Selling the asset crystallizes the loss, turning it into a tool you can potentially use to your advantage. While no one invests with the goal of losing money, understanding how to handle these losses is a key part of smart financial management.
===== The Silver Lining of Losing Money =====
==== Tax Man's Consolation Prize ====
Losing money on an investment is never fun, but a long-term capital loss comes with a valuable consolation prize: a tax deduction. Tax authorities allow you to use these losses to offset your gains, which can significantly lower your tax bill. The process works in a specific order:
  * **First, offset same-type gains:** Your long-term capital losses are first used to cancel out your [[long-term capital gain]]s. For example, if you made $10,000 on one stock but lost $4,000 on another (both held over a year), you only pay tax on the net gain of $6,000.
  * **Next, offset other gains:** If you have more losses than long-term gains, you can then use the remainder to offset [[short-term capital gain]]s.
  * **Finally, offset your income:** If you //still// have losses left over, you can use them to reduce your [[ordinary income]] (like your salary). In the U.S., this is typically limited to $3,000 per year.
What if your loss is larger than your gains and the annual income deduction limit? The remaining amount isn't lost. It becomes a [[capital loss carryover]], which you can carry forward to future tax years to offset gains or income then. It’s the gift that keeps on giving... until it's used up.
===== A Value Investor's Perspective =====
==== A Mistake or a Strategic Move? ====
For a value investor, a realized loss often represents a failure in the initial analysis—the business didn't perform as expected, or you overpaid. Legendary investor [[Warren Buffett]]’s first rule is "Never lose money." His second rule, "Never forget rule No. 1," underscores that avoiding permanent loss of capital is paramount.
That said, even the best investors make mistakes. The smart move is to recognize when an investment's story has fundamentally changed for the worse. In such cases, selling at a loss is a disciplined decision. It achieves two things:
  - It provides the tax benefits described above.
  - It frees up [[capital]] to be redeployed into a more promising investment.
This deliberate strategy of selling losers to offset winners' taxes is known as [[tax-loss harvesting]]. It's a powerful tool for optimizing your portfolio's after-tax returns.
==== The "Wash Sale" Trap ====
Before you rush to sell a losing stock for the tax break, you must know about the [[wash sale rule]]. This is a crucial regulation designed to prevent investors from gaming the system. A wash sale occurs if you sell a security at a loss and then buy 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 disallow your capital loss deduction for that tax year. For example, if you sell 100 shares of Company X for a loss on December 10th and buy 100 shares of Company X back on January 5th, you can't claim the loss. The purpose is to stop you from claiming a tax loss on an investment you effectively still hold. If you're engaging in [[tax-loss harvesting]], be careful to avoid this trap, perhaps by buying a similar but not identical asset (e.g., a different tech company's stock or a broad market index fund).