What can offset capital gains in tax reporting?

Capital losses can offset capital gains in tax reporting because the tax code allows taxpayers to use losses from the sale of investments to reduce taxable income generated from the sale of other investments. When an individual sells an asset for less than its purchase price, that loss can be deducted from any gains made on other asset sales, effectively decreasing the amount of taxable income. If capital losses exceed capital gains, individuals can often use the excess losses to offset other types of income, such as wages, up to a certain limit each tax year.

By utilizing capital losses, taxpayers can manage their overall tax liability more effectively. This mechanism is particularly useful for investors who may experience fluctuations in the market, allowing them to mitigate the financial impact of their investment losses.