A realized loss is the loss you lock in when you sell an asset for less than its adjusted basis. Until the sale settles, a drop in value is only a paper loss and has no effect on your taxes. Once the sale is complete, the loss is real: on investment assets it can offset your capital gains, reduce up to $3,000 of ordinary income per year ($1,500 if married filing separately), and carry forward indefinitely until it’s used up.1Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses Not every realized loss is deductible, though, and a few categories will surprise you.
Realized vs. Unrealized
The line between the two is the sale itself. If you bought stock for $10,000 and it’s now worth $6,000 but you still hold it, the $4,000 drop is unrealized. You cannot deduct it, and you don’t report it. Sell those shares and the same $4,000 becomes a realized loss the IRS recognizes on the settlement date of the transaction.
The size of that loss is the difference between your net sale proceeds and the asset’s adjusted basis. Basis starts as what you originally paid, including commissions and fees. It then moves up for things like capital improvements on real estate, and down for items like depreciation. When proceeds fall below adjusted basis, the shortfall is your realized loss.
How Capital Losses Flow Through Your Return
Realized losses on investment assets — stocks, bonds, mutual funds, investment real estate — are capital losses. You list them on IRS Form 8949 and summarize the results on Schedule D.2Internal Revenue Service. Instructions for Form 8949 (2025)
The Netting Order
You don’t just pile all your losses together. Short-term losses (assets held one year or less) are first netted against short-term gains. Long-term losses (assets held more than one year) are netted against long-term gains. The two subtotals are then netted against each other to produce a single net capital gain or net capital loss for the year.3Internal Revenue Service. Instructions for Schedule D (Form 1040)
The order matters. Short-term gains are taxed at ordinary income rates while long-term gains get preferential rates, so using short-term losses against short-term gains first tends to produce the better result. The Schedule D math handles it for you.
The $3,000 Cap and the Carryover
If netting leaves you with a net capital loss, you can deduct up to $3,000 of it against ordinary income such as wages and interest. Married filing separately drops the cap to $1,500.1Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses The $3,000 figure has been the same since 1978 and isn’t indexed for inflation, so it’s unchanged for 2026.
Anything above that annual cap carries forward into the next year and keeps its short-term or long-term character. In the next year the carryover is applied first against any capital gains, and then up to $3,000 of what remains can be deducted against ordinary income.4Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers The cycle repeats until the loss is exhausted. For individuals, there is no expiration date.
You’re the one tracking the balance. The Capital Loss Carryover Worksheet in the Schedule D instructions works through the math, but the IRS doesn’t keep a running total for you. Lose the number and reconstructing it years later during an audit is difficult.
Realized Losses That Give You Nothing
Two categories of realized loss produce no tax benefit at all.
Personal-Use Property
Selling personal-use property at a loss is not deductible. That covers your home, your car, furniture, and everyday belongings.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses The tax code limits individual loss deductions to assets used in a trade or business or held in a transaction entered into for profit.6Office of the Law Revision Counsel. 26 USC 165 – Losses A personal residence doesn’t qualify, no matter how large the loss.
The asymmetry is real: gains on personal assets are taxable, but losses give you nothing.
Sales to Related Parties
Sell an asset at a loss to a family member, a trust you’re connected to, or a business entity you control, and the IRS disallows the entire loss. The prohibited relationships are broad, covering siblings, spouses, ancestors, lineal descendants, and a long list of entity relationships where common ownership exceeds 50%.7Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers There is a partial offset: the buyer can use the disallowed loss to reduce any gain when they eventually sell the asset to an unrelated party.
The Wash Sale Rule
You can also lose the current-year benefit of a realized loss by buying back the same security too soon. The wash sale rule disallows the loss if you acquire a substantially identical security within a 61-day window: the 30 days before the sale, the sale date itself, and the 30 days after. The disallowed loss is added to the basis of the replacement security, so the tax benefit is postponed rather than destroyed.8Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
Say you sell stock at a $1,000 loss and buy it back the next day for $5,000. The disallowed $1,000 is added to your new basis, making it $6,000. When you eventually sell the replacement, the higher basis produces a smaller gain or a larger deductible loss.
“Substantially identical” generally means the same stock or bond. Buying a different company in the same industry, or swapping an S&P 500 fund from one provider for a similar one from another, typically doesn’t trigger the rule. The IRS has never published a bright-line definition, so the closer two securities are, the more risk you carry.
The IRA Trap
Selling a stock at a loss in a taxable account and repurchasing it in an IRA or Roth IRA inside the 61-day window still triggers the wash sale rule, but here the loss is permanently gone. IRAs don’t track basis the same way taxable accounts do, so the usual basis adjustment can’t happen. The IRS confirmed in Revenue Ruling 2008-5 that the loss is disallowed and the IRA’s basis is not increased.9Internal Revenue Service. Revenue Ruling 2008-5 – Loss From Wash Sales of Stock or Securities
Cryptocurrency
The wash sale statute applies to “stock or securities.” The IRS treats digital assets like cryptocurrency as property, not securities.10Internal Revenue Service. Digital Assets As of 2026, no finalized federal legislation extends the wash sale rule to crypto, so selling Bitcoin at a loss and immediately repurchasing it doesn’t trigger a wash sale under the current statutory text.
Worthless Securities and Bad Debts
Worthless Securities
When a security loses all value — the issuer goes bankrupt with no recovery, the stock is delisted and untradeable, the company ceases operations with nothing left — you can claim a capital loss without a sale. The tax code treats a worthless security as sold for $0 on the last day of the tax year it became worthless.6Office of the Law Revision Counsel. 26 USC 165 – Losses Whether the loss is short-term or long-term depends on how long you held the security through that December 31 date.
Timing is the hard part. A stock trading at pennies isn’t worthless. You must claim the loss in the year it actually became worthless. If you later realize a security became worthless in a prior year, you generally have seven years, rather than the usual three, to file an amended return.
Nonbusiness Bad Debts
If you lend money outside a business context and it’s never repaid, the loss is a nonbusiness bad debt. The tax code treats it as a short-term capital loss regardless of how long the debt was outstanding.11Office of the Law Revision Counsel. 26 USC 166 – Bad Debts It flows through the same Schedule D netting and $3,000 rules as any other capital loss.
Two catches. The debt must be totally worthless; there’s no partial deduction for personal loans. And the IRS scrutinizes these claims closely, so you’ll want documentation that the loan was genuine (not a gift), that you tried to collect, and that you had a reasonable basis for concluding it was uncollectible.
Gifted and Inherited Assets
How you got the asset changes what the realized loss looks like.
Gifts and the Dual Basis Rule
When you receive an asset by gift and its fair market value on the gift date is lower than the donor’s basis, a special dual basis rule applies. For calculating a loss, your basis is the lower fair market value on the gift date, not the donor’s higher cost.12eCFR. 26 CFR 1.1015-1 – Basis of Property Acquired by Gift
Suppose your parent bought stock for $10,000 and gifts it to you when it’s worth $7,000. If you sell for $5,000, your loss is $2,000, not $5,000. The $3,000 decline that happened before the gift is permanently gone for tax purposes. Sell for $8,500, between the two basis figures, and you recognize no gain and no loss. The rule prevents shifting built-in losses to another taxpayer by gift.
Inherited Assets
Property inherited from someone who died generally takes a basis equal to fair market value on the date of death.13Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent The step-up works both directions. If stock the decedent bought for $20,000 was worth $8,000 at death, your basis is $8,000, and the $12,000 decline during their lifetime is a loss no one can claim.
Business Losses Follow Different Rules
Realized losses inside a business don’t route through Schedule D. Losses from selling inventory are ordinary losses, fully deductible against business income with no annual cap. Losses on depreciable business property held more than one year — machinery, equipment, vehicles, real estate used in the business — fall under Section 1231 and get favorable hybrid treatment: losses are ordinary (fully deductible), while gains are long-term capital gains.14Office of the Law Revision Counsel. 26 USC 1231 – Property Used in the Trade or Business and Involuntary Conversions These losses are reported on Form 4797 rather than Schedule D.15Internal Revenue Service. Instructions for Form 4797