What Is a Short-Term Loss?

Short-Term Losses Explained in Less Than 4 Minutes

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A short-term loss is a negative return on an asset that's held for one year or less, generally speaking. Some exceptions apply to this time frame, where an asset might be held for less than a year but still count as a long-term loss.

Knowing the difference between short-term and long-term losses can help you optimize your investment strategy and tax management.

Definition and Examples of Short-Term Losses

A short-term loss typically occurs when you sell an asset you’ve held for one year or less at a lower price than you paid. The IRS classifies asset gains and losses because, at tax time, a sale’s classification determines the type of taxes you may have to pay.

A short-term loss is simple to demonstrate. For example, assume you bought $10,000 worth of stock in January. In October of that same year, you sold the stock when it was valued at $6,000. You took a $4,000 short-term loss if there were no other factors influencing its value.

How Short-Term Losses Work

If you own an asset for less than one year and sell it for less than the total amount you paid, you’ve lost money. Whether it is a short-term loss, long-term loss, or not claimable as a loss is determined by the IRS. You’ll first need to figure out the asset’s adjusted basis before deciding you’ve taken a short-term loss.

Adjusted Basis

Your asset has to be valued appropriately when you’re figuring out whether you’ve taken a loss. When you’ve sold the asset, the IRS requires that you calculate its adjusted basis, then determine the difference between the adjusted basis and the sale price. If the sale price is less than the adjusted basis, then you have taken a capital loss.

The IRS defines the basis for most assets as the price you paid plus any other additional costs such as commissions or fees. Stocks and bonds you were given have different basis treatments, such as accounting for appreciation, their fair market value on the date you were given them, or the previous owner’s basis.


You can also take a short-term loss in other types of assets, such as real estate. However, you can’t deduct short-term losses on the sale of your personal home, but you could potentially have short-term losses from the sale of a business property.

Additionally, some assets held for less than a year could end up counting as long-term capital gains or losses. For example, inherited stock would automatically be considered long-term, regardless of how long the inheritor holds the assets.

What It Means for Individual Investors

When a sale counts as a short-term loss, the IRS allows you to use your capital losses to offset your short-term capital gains by an equivalent amount to reduce your total tax liability.

For instance, suppose you had $10,000 in long-term gains for the year, and $10,000 in short-term gains. During that same tax year, you also decided to sell stock you’ve held for years at $10,000 less than your initial investment and adjusted basis, making it a long-term loss.


Taxes can become complex very quickly, so if you’re buying and selling assets, it’s best to have a tax professional help you.

You would then need to subtract that long-term loss from the $10,000 in long-term gains, which would bring your long-term gains to zero. But you would still owe taxes based on $10,000 in short-term gains; those are taxed at ordinary income rates, which are generally much higher than the 15% rate used in many cases for long-term gains.

However, if in this same scenario you instead decided to sell stock you’ve only held for a few months at a $10,000 loss, you could bring your short-term gains to zero. So instead of paying ordinary income tax rates on the $10,000 in short-term gains, you could instead pay long-term capital gains rates on your $10,000 worth of long-term gains.

After offsetting short-term capital gains, if you still have a higher amount in short-term losses, you can then use them to offset any long-term capital gains.

Key Takeaways

  • A short-term loss typically applies to assets that you lose money on and have held for one year or less.
  • Short-term losses can reduce your tax liability, starting by offsetting an equivalent amount of short-term capital gains.
  • Some investment and tax management strategies might utilize short-term losses before long-term losses to help taxpayers save money.
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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

  2. Internal Revenue Service. "Topic Number 703 Basis of Assets."

  3. H&R Block. "Holding Period."

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