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Capital Loss

Capital Loss is the loss incurred when selling an asset or a cryptocurrency at a price lower than its original purchase price.

Capital loss is a key concept in both cryptocurrency and accounting. It refers to the loss incurred when selling an asset at a price lower than its original purchase price. This loss is realized only when the asset is sold or disposed of, and until then, it remains a potential loss on paper.

Understanding Capital Loss:

When you purchase an asset, such as cryptocurrency, stocks, real estate, or any other investment, you acquire it at a specific price, known as the "cost basis" or "purchase price." If the value of the asset decreases over time, and you sell it at a price lower than the cost basis, the difference between the selling price and the original purchase price represents the capital loss.

Similar to capital gains, capital losses can also be either short-term or long-term, depending on the holding period of the asset:

Short-term Capital Loss:

If you sell the asset within a year of purchase, any loss incurred is considered a short-term capital loss. Short-term capital losses can be used to offset short-term capital gains for tax purposes.

Long-term Capital Loss:

If you hold the asset for more than a year before selling it at a loss, the loss qualifies as a long-term capital loss. Long-term capital losses can be used to offset long-term capital gains, potentially reducing the overall tax liability.


Let's consider two examples to illustrate capital loss:

Example 1: Cryptocurrency Investment

Alex buys 5 Ethereum coins for $1,000 each. After six months, the market value of 1 Ethereum drops to $600. Alex decides to sell all 5 coins, incurring a capital loss of $2,000 ($600 - $1,000) x 5.

Example 2: Stock Investment

Sarah purchases 50 shares of a pharmaceutical company's stock at $80 per share. After a year, the stock price declines to $60 per share, and Sarah sells all her shares. Her capital loss is $1,000 ($60 - $80) x 50.


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