Ordinary Loss

Ordinary Loss

An ordinary loss is a loss realized in the normal course of business or from non-capital transactions when expenses exceed revenues. It is distinct from a capital loss and, generally, is fully deductible against ordinary income in the year it is incurred.

Key points

• Ordinary losses arise from business operations or non-capital transactions (e.g., inventory, supplies, accounts receivable, rental property used in a trade or business, and intellectual property created in the course of business).
• Ordinary losses are deductible one-for-one against ordinary income with no statutory dollar limit.
• Capital losses come from selling capital assets (stocks, personal-use property, certain investments) for less than their cost. Capital losses are subject to limitations.
• Tax rates differ: ordinary income is taxed at graduated ordinary rates (10%–37% in 2025), while net long-term capital gains are taxed at lower rates (0%–20%); very high earners may also face the 3.8% net investment income tax.

What qualifies as an ordinary loss

Common sources of ordinary loss include:
* Business operating losses (when business expenses exceed revenues)
* Losses from the sale of inventory, business supplies, or accounts receivable
* Losses on property created or produced by the taxpayer in the conduct of a trade or business (e.g., a musical score written and sold at a loss)
* Casualty and theft losses (depending on circumstances)
* Related-party transactions that are treated as ordinary losses
* Section 1231 properties (real or depreciable business property held over one year) may produce ordinary or capital treatment depending on netting rules

Example: If you spend $110 creating a musical composition and sell it for $100, the $10 shortfall is an ordinary loss.

Ordinary loss vs. capital loss

• Capital loss: results from selling a capital asset (like publicly traded stock or personal-use property) for less than its basis. Capital losses can generally only offset capital gains, and up to $3,000 of excess capital loss can offset ordinary income per year (with any remaining loss carried forward).
• Ordinary loss: offsets ordinary income fully in the year incurred and is not subject to the $3,000 capital-loss limitation.

Netting example (simplified)

1. Calculate ordinary income (business revenue minus business expenses).
2. Calculate short-term and long-term capital gains and losses separately, then net them.
3. Capital netting can result in a net capital loss that offsets capital gains and up to $3,000 of ordinary income; remaining capital losses carry forward.

Illustrative numbers:
* Ordinary income: $100,000 revenue − $80,000 expenses = $20,000 ordinary gain
* Short-term capital net: $1,000 gain
* Long-term capital net: $11,000 loss
* Combined capital net: $10,000 net long-term capital loss
* Apply $3,000 of capital loss to ordinary income → ordinary gain reduced to $17,000
* Remaining $7,000 capital loss is carried forward

Tax treatment and carryovers

• Amount deductible: Ordinary losses are generally fully deductible against ordinary taxable income in the year incurred; there is no statutory dollar limit on the deduction itself.
• Carryovers: Ordinary losses are typically deducted in the year they occur and are not carried forward. By contrast, excess capital losses beyond the annual limit may be carried forward to future years.

Special considerations

• Section 1231 property: Gains and losses from certain business real estate and depreciable property held over one year receive special netting treatment; net losses may be treated as ordinary losses.
• Casualty/theft and related-party sales: These can be treated as ordinary losses depending on facts and tax rules.
• High earners: Ordinary losses reduce ordinary taxable income, which is taxed at ordinary tax rates; taxpayers in high brackets should also consider potential interactions with the net investment income tax for investment-related items.

Bottom line

An ordinary loss arises from business operations or non-capital transactions and is generally fully deductible against ordinary income in the year incurred, offering more immediate tax relief than capital losses. Capital losses face limitations and may require carryforwards, so taxpayers often prefer qualifying losses to be ordinary when possible under the tax rules.