Short-Term Capital Loss

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Short-Term Capital Loss

The loss one realizes by closing a position one has held for less than one year. For example, if one buys a stock or bond and sells it five months later for less than what one paid, the loss is considered a short-term capital loss. One may write off short-term capital losses against any capital gains.
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Short-term capital losses, including short-term capital loss carryovers, are first applied to reduce short-term capital gains.
Similar to annuity trusts, unitrusts reported unusually large net short-term capital losses for 2001.
Short-term capital losses first offset short-term capital gains (such as those from stock investments); any excess offsets long-term capital gains.
Example 3: The facts are the same in Example 1, except that the trading activity produced $200,000 of short-term capital losses instead of gains.
A 50% deduction for individual or corporate taxpayers' "net capital gains" (the excess of net long-term capital gains over net short-term capital losses) would be available for sales of capital assets on or after January 1, 1995.
Excess short-term capital losses also may offset up to $3,000 of regular income per year.
Individual taxpayers may deduct two different types of bad debts: business bad debts, which are deductible as ordinary losses if completely or partially worthless, and nonbusiness bad debts, which are short-term capital losses taken only when entirely worthless.
For noncorporate taxpayers, however, this allowance is qualified; losses attributable to nonbusiness bad debts are treated as resulting from the sale or exchange of capital assets held for not more than one year (i.e., short-term capital losses).
The Tax Court held that the doctor was an investor, not a professional money lender; thus, the losses were nonbusiness bad debts and short-term capital losses. If the basis of a loan was reduced by allowed losses and the loans were repaid, payment of a note receivable would yield capital gain treatment, while the existence of an open account would result in ordinary income.