Holding loss definition
/What is a Holding Loss?
A holding loss is a reduction in the value of an asset that continues to be owned. Depending on the circumstances, a holding loss may be recognized by the holder of the asset. Alternatively, the loss may not be recognized until the asset is dispositioned at a future date. A holding loss cannot be used to offset taxable gains; the related asset must first be sold. The owner of an asset may elect to incur a holding loss and not sell an asset, hoping that it will regain the lost value at a later date.
Examples of Holding Losses
Here are several examples of holding losses:
Security holding loss. An investor holds shares of ABC Corporation for which he paid $10,000. The market price of the shares subsequently declines to $7,000. The investor continues to hold the shares, so he experiences a holding loss of $3,000. The investor cannot recognize this loss as a taxable loss until he sells the shares, at which point he will have realized the loss and can then claim it on his tax return.
Commodity holding loss. A business buys 1,000 barrels of oil at $80 per barrel. Due to market fluctuations, the price drops to $65 per barrel while the business still holds the inventory. This results in a holding loss of $15 per barrel, for a total holding loss of $15,000.
Terms Similar to Holding Loss
A holding loss is also known as a paper loss.
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Holding Loss FAQs
Do holding losses affect taxable income?
Holding losses affect taxable income only when tax law permits recognition. Realized losses are generally deductible, subject to capital-loss limitations and other restrictions. Unrealized losses usually do not affect taxable income unless mark-to-market rules, inventory valuation provisions, impairment deductions, or specialized tax regulations require earlier recognition.