What Is an Ordinary Loss?
Let me explain what an ordinary loss is: it's the loss you realize as a taxpayer when your expenses outstrip your revenues in regular business operations. These are losses that aren't classified as capital losses, and the key point is that an ordinary loss is fully deductible, allowing you to offset your income and lower the taxes you owe.
Understanding Ordinary Loss
You might encounter ordinary losses from various sources, like casualty or theft. If these losses exceed your gross income in a tax year, they become deductible. Remember, capital and ordinary rates apply to different asset sales and transactions, tied to your marginal tax rate. Net long-term capital rates are much lower than ordinary rates, which is why you generally want capital rates on gains but ordinary rates on losses.
For 2025, ordinary rates graduate over seven brackets from 10% to 37%, while net long-term capital rates range from 0% to 20%. If you're in the top bracket, you'll also face a 3.8% net investment income tax.
Ordinary Loss vs. Capital Loss
Think of an ordinary loss as a catch-all for any loss not deemed a capital loss. A capital loss happens when you sell a capital asset, like stocks or personal property, for less than its cost. In contrast, you recognize an ordinary loss when selling items like inventory, supplies, business receivables, rental real estate, or intellectual property such as music, literature, software, or art.
It's also the loss from running a business that doesn't profit because expenses beat revenues. If you create or produce property through your efforts in a trade or business, any loss from that is ordinary. For instance, if you spend $110 on a musical score and sell it for $100, you've got a $10 ordinary loss.
Other sources include casualty, theft, related party sales, or sales of Section 1231 property—like real or depreciable business assets held over a year.
Ordinary Losses for Taxpayers
As a taxpayer, you'll prefer your losses to be ordinary because they provide bigger tax savings than long-term capital losses. An ordinary loss is mostly fully deductible in the year it occurs, offsetting ordinary income dollar for dollar. Capital losses, however, are limited: they offset capital gains and only up to $3,000 of ordinary income, with the rest carried forward.
Here's an example to make it clear. Suppose you earn $100,000 with $80,000 in expenses, netting $20,000 ordinary gain. You buy stocks and bonds: sell short-term for $2,000 gain on stock and $1,000 loss on bonds, netting $1,000 short-term capital gain. For long-term, $3,000 gain on bonds and $14,000 loss on stock, netting $11,000 long-term capital loss. Overall, net capital is $10,000 long-term loss. After offsetting $3,000 against your ordinary gain, you have $17,000 ordinary gain, and carry forward the remaining $7,000 capital loss.
How Much Ordinary Loss Can You Claim on Taxes?
You can fully deduct an ordinary loss from your taxable income—there are no limits on the amount.
Can You Carry Over Ordinary Losses?
Ordinary losses get fully deducted in the year they happen and can't be carried forward. On the other hand, if capital losses exceed the deductible limit, you can carry them over to future years.
What Is the Difference Between an Ordinary Loss and a Capital Loss?
A capital loss comes from selling a capital asset below cost, like equipment bought for $10,000 and sold for $8,000, resulting in a $2,000 loss. An ordinary loss arises when business expenses exceed income, from selling non-capital assets, or certain transactions.
The Bottom Line
In summary, an ordinary loss is what you get when expenses exceed revenues in business operations—it's not a capital loss and is fully deductible to cut your tax bill.
Key Takeaways
- You realize an ordinary loss when expenses exceed revenues in normal business operations.
- Ordinary losses differ from capital losses.
- An ordinary loss is fully deductible to offset income, reducing your tax owed.
- Capital losses happen when capital assets sell for less than cost.
- You can deduct capital losses up to a limit, but ordinary losses have no limit.
Other articles for you
Disability insurance provides income replacement for those unable to work due to disability.
A notice of termination is a formal document notifying an employee of the end of their employment, covering reasons, legal requirements, and procedures.
The gas guzzler tax is a U.S
Recurring revenue is the predictable portion of a company's sales that it can expect to receive regularly over time.
An organizational structure is a system that directs activities and information flow to achieve company goals.
Equilibrium is the state where market supply and demand balance each other, resulting in stable prices.
The pretax profit margin measures a company's operating efficiency by showing the percentage of revenue turned into profit before taxes.
The Consumer Price Index (CPI) measures the average change in prices paid by consumers for goods and services over time.
SEC Form 10-Q is a quarterly unaudited financial report that public companies must file with the SEC to disclose their financial performance.
Loan repayment involves paying back borrowed money through scheduled payments covering principal and interest, with various options and consequences for different loan types.