What are capital losses, and how can they be deducted?

Capital losses occur when an asset, such as stocks or real estate, is sold for less than its original purchase price. These losses can be utilized for tax purposes to offset capital gains accrued in the same tax year, effectively reducing the taxable amount of those gains. Furthermore, if capital losses exceed capital gains, taxpayers can deduct a portion of the remaining loss against ordinary income, which is capped at $3,000 per year for married couples filing jointly or $1,500 for married individuals filing separately. This provision allows individuals to lower their taxable income and, consequently, their tax liability.

In the context of the other options: the first choice inaccurately describes capital losses as resulting from selling an asset for more than its purchase price, which is actually a capital gain, not a loss. The third option mistakenly states that capital losses can only be deducted if total income exceeds $100,000, which is not a requirement under tax law. Finally, the fourth choice incorrectly asserts that capital losses cannot be deducted from any income, as the ability to offset capital gains and ordinary income (up to the specified limit) is an established aspect of tax regulations.