A capital gain or loss is first derived from the difference of the adjusted basis of an asset and the amount realized. Your basis is how much you paid for the asset, plus anything else that you have put into it, and the amount realized is how much you that you get from the sale or exchange.

A capital loss can come from the sale of other property such as investment property, mutual funds or stocks.

A capital loss can happen if you sale your property for a lower value than what you have put into it. It is the difference from the exchange or sale of a capital asset.

Not all loss on property is classified as a capital loss. A person can not deduct a capital loss on business inventory or merchandise that you sale to customers, depreciable machinery or equipment, computers, fixtures, and residential rental property, those losses are considered ordinary losses.

Losses on your personal property such as your residence, car, and etc. are not deductible, although any profits are taxable. Losses between related parties are not allowed.

Capital losses are deductible against any capital gains subject to a limit of $3000.00 for married filing jointly or $1500 for single or if married filing separately and will be classified as either long-term (held for one year or more) or short-term (held for one year of less) depending on when the asset was acquired.

If your loss is greater than the limit, the amount leftover is carried forward until it is used up in future years. If a person dies before the capital loss is fully taken the excess can not be deducted. Capital gains and losses are reported on the IRS form Schedule D.

Works Cited:

"Professional Edition J.K. Lasser's Your Income Tax 2007" Prepared by the J.K. Lasser Institute John Wiley & Sons, Inc. Copyright 2006

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