What is a capital loss?

A capital loss refers specifically to the financial loss that an investor experiences when selling a capital asset for less than its original purchase price. Capital assets typically include items like stocks, bonds, real estate, and other significant investments. When these assets are sold at a price lower than what they were bought for, the difference is recognized as a loss.

This concept is crucial in taxation because capital losses can be used to offset capital gains, reducing the overall tax liability for an individual or business. If capital losses exceed capital gains, they may also be used to reduce ordinary income up to a certain limit, thereby providing a valuable tax advantage.

In the context of the other answer choices, while profit from selling assets refers to capital gains, a tax deduction may result from recognizing a capital loss, but it is not itself defined as a capital loss. Income from asset investments generally relates to earnings rather than losses and does not pertain to the idea of losing value on sold assets. Therefore, the definition provided aligns precisely with the concept of capital loss in taxation.