How to Set off and Carry Forward Capital Losses (2024)

When you calculate your Capital Gains and where the sale receipts from the capital asset is less than cost of acquisition (whether indexed or not) and expenses on transfer – instead of a capital gain you incur a capital loss.

While capital gains are taxed according to the tax rate applicable, based on the type of asset and they are long-term or short-term. Let’s understand how capital losses are treated.

Set off of Capital Losses

The Income-tax Act,1961 does not allow loss under the head capital gains to be set off against any income from other heads – this can be only set off within the ‘Capital Gains’ head.

  • Long Term Capital Loss can be set off only against Long Term Capital Gains.
  • Short Term Capital Losses are allowed to be set off against both Long Term Gains and Short Term Gains.

Carry Forward of Losses

Fortunately, if you are not able to set off your entire capital loss in the same year, both short-term and long-term loss can be carried forward for 8 assessment years immediately following the assessment year in which the loss was first computed.

If capital losses have arisen from a business, such losses are allowed to be carried forward and carrying on of this business is not compulsory. Do you have previous year’s losses you want to carry forward – Here’s a very easy guide that explains how you can add your previous year’s losses to your IT Return on cleartax.in.

Let’s try to understand this with the example below

During the FY 2023-24, Mr Chetan has the following income and brought forward losses:

Particulars

Amount

Short-term capital gains on sale of shares

1,75,000

Brought forward Long-term capital loss of AY 2022-23

(96,000)

Short-term capital loss of AY 2023-24

(42,000)

Long term capital gain u/s 112

85,000

What is the capital gain taxable in the hands of Mr. Chetan for the AY 2024-25?

Solution:

Particulars

Amount

Amount

Short-term capital gains on the sale of shares

Less: Brought forward short-term capital loss of the AY 2023-24

Long-term capital gain

Less: Brought forward long-term capital loss of AY 2022-23 of Rs96,000 set-off to the extent of Rs 85,000

Taxable short-term capital gains

1,75,000

(42,000)

85,000

(85,000)

1,33,000

Nil

1,33,000

Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the unadjusted long-term capital loss of AY 2022-23 of Rs 11,000 (i.e., Rs 96,000 – Rs 85,000) has to be carried forward to the next year to be set off against long-term capital gains of that year.

Treatment of Long-term Loss on Shares and Equity Funds

If you have incurred a long-term capital loss on selling shares or equity mutual fund units after 31.3.2018 then you can set them off against any LTCG. As profits/gains on long term shares or equity funds are now taxable in excess of Rs.1 lakh.

Also, you can carry forward these losses for setting off in later years up to 8 assessment years. Prior to 31.03.2018, there was no tax on long term gains on shares & equity funds, therefore long term gains on shares & equity funds were considered as a dead loss. Therefore, the same was not allowed to set off or carried forward.

Shares and Equity Funds are long term capital assets when held for more than 12 months.

Mandatory Filing of a Return

To keep a track of your losses, the income tax department has laid out that losses for a year cannot be carried forward unless that year’s return has been filed before the due date.

Even if it’s a loss return, you do not have any income to show – do file your return before the due date.

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Set-off and Carry Forward of Losses

How to Set off and Carry Forward Capital Losses (2024)

FAQs

How to Set off and Carry Forward Capital Losses? ›

You can carry over capital losses indefinitely. Figure your allowable capital loss on Schedule D and enter it on Form 1040, Line 13. If you have an unused prior-year loss, you can subtract it from this year's net capital gains.

What are the rules for carrying forward capital losses? ›

Capital losses that exceed capital gains in a year may be used to offset capital gains or as a deduction against ordinary income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.

Why are capital losses limited to $3,000 IRS? ›

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

Can I offset capital losses against income? ›

Losses made from the sale of capital assets are not allowed to be offset against income, other than in very specific circ*mstances (broadly if you have disposed of qualifying trading company shares). You cannot claim a loss made on the disposal of an asset that is exempt from capital gains tax (CGT).

Do I have to use a capital loss carryforward even if I have no taxable income? ›

You may be able to carry over your full capital loss even though a $3,000 deduction is allowed. You're allowed to deduct capital loss up to the amount of your capital gain plus $3,000, with any unused loss carried over to the next year.

Can you carry forward capital losses for 5 years? ›

Net Capital Loss Carryover

A corporation may carry most unused capital losses back for three years, and forward for five years. However, foreign expropriation capital losses may only be carried forward for 10 years.

How long can you carry forward losses for capital gains? ›

To be eligible to be carried forward a capital loss must be claimed within four years of the end of the tax year in which it arose, so by 5 April 2023 for losses that arose in 2018/19. Some categories of capital losses can be used more flexibly, for example against income for the current or pervious tax year.

Are capital losses 100% deductible? ›

Deducting Capital Losses

If you don't have capital gains to offset the capital loss, you can use a capital loss as an offset to ordinary income, up to $3,000 per year. If you have more than $3,000, it will be carried forward to future tax years." Here are the steps to take when it comes to tax filing season.

How much capital loss carryover can I use to offset capital gains? ›

There is no limit on how much of the carryover can be used to offset capital gains. For example, suppose you have a $20,000 capital loss carryover from 2021 to 2022. If you have a net capital gain of $5,000 in 2022, $5,000 of the capital loss carryover will be used to offset the capital gain.

How much stock loss can you write off per year? ›

The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately). Any unused capital losses are rolled over to future years. If you exceed the $3,000 threshold for a given year, don't worry.

Can I use capital losses against ordinary income? ›

Capital losses can indeed offset ordinary income, providing a potential tax advantage for investors. The Internal Revenue Service (IRS) allows investors to use capital losses to offset up to $3,000 in ordinary income per year.

Can you skip a year capital loss carryover? ›

However, U.S. tax code generally does not allow you to skip a year for using capital loss carryovers. You are usually required to use them in the next tax year, offsetting capital gains first before applying any remaining amounts to reduce up to $3,000 of other kinds of income.

What are examples of capital losses? ›

Understanding a Capital Loss

For example, if an investor bought a house for $250,000 and sold the house five years later for $200,000, the investor realizes a capital loss of $50,000. For the purposes of personal income tax, capital gains can be offset by capital losses.

How can I deduct more than 3,000 capital losses? ›

Limit on the deduction and carryover of losses

If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in Publication 550 or in the Instructions for Schedule D (Form 1040)PDF to figure the amount you can carry forward.

At what age do you not pay capital gains? ›

Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.

How much capital loss can you deduct per year? ›

The IRS will let you deduct up to $3,000 of capital losses (or up to $1,500 if you and your spouse are filing separate tax returns). If you have any leftover losses, you can carry the amount forward and claim it on a future tax return.

What is the capital loss rule? ›

You have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis. Losses from the sale of personal-use property, such as your home or car, aren't tax deductible.

Can I skip a year for capital loss carryover? ›

However, U.S. tax code generally does not allow you to skip a year for using capital loss carryovers. You are usually required to use them in the next tax year, offsetting capital gains first before applying any remaining amounts to reduce up to $3,000 of other kinds of income.

How much capital gains can I offset with losses? ›

You can use capital losses to offset capital gains during a tax year, allowing you to remove some income from your tax return. You can use a capital loss to offset ordinary income up to $3,000 per year If you don't have capital gains to offset the loss.

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