Over 2 million + professionals use CFI to learn accounting, financial analysis, modeling and more. Unlock the essentials of corporate finance with our free resources and get an exclusive sneak peek at the first module of each course.
Start Free
What is Capital Loss?
Capital loss is the reduction in the value of a company’s capital, i.e., investments, capital assets, etc. The loss is realized when capital assets are sold for a price lower than the original price.
How to Calculate Capital Loss?
The formula for capital loss is as follows:
Capital Loss = Purchase Price – Sale Price
If the sale price is higher than the purchase price, it is referred to as a capital gain.
Illustrative Example
For example, say, ABC Ltd. plans on expanding its manufacturing unit. For such a purpose, the company purchases a factory worth $800,000. Ten years later, the company decides to sell the factory to upgrade to a larger one.
The business sells the factory for $740,000. Applying the capital loss formula with the information available:
$800,000 – $740,000 = $60,000
Hence, the company realizes a capital loss of $60,000 from the sale.
Holding Period
The holding period for an investment or a capital asset is the time period between the purchase and sale of a capital asset, i.e., the period of time that the asset is held by the investor. This holding period is crucial for taxation purposes on capital gains and losses. Regading the holding period of the capital assets, capital losses are divided into two categories:
Short-term capital losses (less than one year)
Long-term capital losses (one year or longer)
Capital losses are required to be categorized into long-term and short-term types before reporting them on tax returns.
Accounting for Capital Losses
Capital losses are first accounted for against capital gains in the sense that they are first used to offset any corresponding capital gains of the same type earned during the year. Hence, all short-term capital losses are treated as a deduction against all short-term capital gains, and all long-term capital losses against long-term capital gains.
The net capital loss arising out of the deductions is subtracted from the company’s income through subsequent years as a carry forward of the remaining capital loss balance. While it is how accounting for capital loss is generally practiced around the world, many countries adhere to their own set of rules and regulations regarding taxation and capital loss accounting on income.
Tax Deductibility
Capital loss is tax-deductible. It means that capital loss can be accounted for to reduce the total income subject to taxation. However, capital loss is only regarded as a deductible when they are realized, not when they are accrued. Hence, until the capital asset is actually physically sold off, the accrued capital loss is unrealized, becoming realizable only on the literal sale of the asset.
Additional Resources
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
Learn accounting fundamentals and how to read financial statements with CFI’s online accounting classes.
These courses will give you the confidence to perform world-class financial analyst work. Start now!
Boost your confidence and master accounting skills effortlessly with CFI’s expert-led courses! Choose CFI for unparalleled industry expertise and hands-on learning that prepares you for real-world success.
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.