Capital Losses and Ordinary Losses Receive Different Tax Treatment

A capital loss results when you sell a capital asset, such as stocks and bond, for less than your cost. An ordinary loss occurs from the normal operations of a business when expenses exceed income. When capital losses exceed capital gains a net capital occurs. Net capital losses can be deducted up to $3000 from wages, interest, and dividends. If a net capital loss exceeds $3000 then the excess must be carried over to the following year. Individual taxpayers cannot carry back any part of a net capital loss to a prior year. However, corporations do not have a deduction limit and can carry back portions of capital loss to prior years.

Advantages of Ordinary Loss

Ordinary losses are fully deductible in the year loss was incurred and is not subject to a deduction limit. Furthermore, if a loss is taken under Section 1231 then it is fully deductible as an ordinary loss. Section 1231 applies to the sale or exchange of real or depreciable property used in a trade or business and held for over one year. Another benefit under 1231 is that gains are taxed as long-term capital gains at the lower capital gain rates.

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