What Is a Capital Loss Carryover? Rules, Examples and Definition (2024)

You may be familiar with the tax implications of capital gains, but what about capital loss? A capital loss refers to the money that your investments lose. You can write off your capital losses from your taxes and do it year after year by using what’s known as capital loss carryover. This way you only have to use the portion of the loss every year that helps you with your taxes. Consider working with a financial advisor if you’re looking for more tax planning strategies for your specific situation.

What Is Capital Loss Carryover?

Capital loss carryover is the ability to use the capital loss tax deduction over multiple years if the loss is large enough. This means you can use the capital loss to offset taxable income. The IRS caps your claim of excess loss at the lesser of $3,000 or your total net loss ($1,500 if you are married and filing separately).

Capital loss carryover comes in when your total exceeds that $3,000, letting you pass it on to future years’ taxes. There’s no limit to the amount you can carry over. You simply carry over the capital loss until it’s gone.

If you want to read it for yourself, IRS Topic No. 409 lays out what you need to know about capital loss carryover. It also includes links to worksheets you can use to determine the amount you can carry forward.

How to Deduct Capital Losses on Your Taxes

Here are the two main ways to deduct capital losses from your taxes.

Deduct From Capital Gains

When you pay taxes you calculate both your long- and your short-term capital gains. Long-term capital gains are all the profits you made by selling assets held for more than one year and are taxed at the lower capital gains tax rate. Short-term capital gains are all the profits you made by selling assets you held for less than one year. These are taxed as ordinary income.

Then, you calculate your capital losses, in the same way, determining both long-term and short-term losses on the same basis.

Your capital losses offset same-category capital gains first. This means that long-term losses first offset long any term gains and short-term losses first offset short-term gains. Once your losses exceed your gain, you can carry that category’s losses over to the other.

For example, say you had the following trade profile in a year:

  • Long-term gains: $1,000
  • Long-term losses: $500
  • Short-term gains: $250
  • Short-term losses: $400

First, you deduct your long-term losses from your long-term gains, leaving you with taxable long-term capital gains of $500 for the year ($1,000 – $500). The next thing to do is to deduct your short-term losses from yourshort-term gains. Since your short-term losses are greater than your short-term gains, this leaves you with zero taxable short-term capital gains ($250 gains – $400 losses).

You now carry over excess losses from one category to the next. In this case, your short-term losses exceeded your short-term gains by $150. So you reduce your remaining long-term gains by that amount, leaving you with taxable long-term capital gains of $350 for the year ($500 long-term gains after losses – $150 excess short-term losses).

Deduct Excess Losses From Income

Capital losses can apply to ordinary income taxes – to a limited extent. Say you have a verybad year in the market. You sell stocks for a total gain of $10,000, but sell other stocks for a total loss of $15,000. You could deduct the first $10,000 of those losses from your capital gains, leaving you with no taxable capital gains for the year. This would leave you with an excess capital loss of $5,000.

You can claim $3,000 of those losses as deductions on yourordinary income taxesfor the year. Then, the following year, you can claim the remaining $2,000 as a carried-forward deduction on that year’s income taxes.

What Is Tax Loss Harvesting?

Tax loss harvesting is a strategic method used to offset capital gains with capital losses. Basically, if an investor expects a windfall from the sale of one asset, they’ll also sell an underperforming asset at a loss to get the capital loss tax deduction. The investor is communicating to the IRS that, yes, they had a large gain, but they also had losses and should be taxed less.

Typically investors using tax loss harvesting wait until the end of the year so they can be sure of potential losses. Meanwhile, once they’ve sold the assets at a loss, they’ll buy up similar assets to stay invested in that space and maintain asset allocation. If you’re considering tax loss harvesting, just keep in mind the wash-sale rule so you don’t get in trouble with the IRS.

What Is the Wash Sale Rule?

The wash sale rule is a rule put in place by the IRS to discourage investors from using tax breaks unfairly. Essentially, it prevents investors from selling an asset at a loss and buying that asset again. The wash sale rule says that investors need to have a minimum of 30 days before or after a sale of a loss to re-purchase assets that they sold at a loss.

The rule also prevents you from purchasing “substantially identical” assets in less than 30 days. Unfortunately, the IRS does not concretely define what “substantially identical” means. On Page 56 of Publication 550, they say, “In determining whether stock or securities are substantially identical, you must consider all the facts and circ*mstances in your particular case.”

It’s safe to say that the same stock from the same company is substantially identical. However, it’s a lot more complicated if you’re talking about buying and selling mutual funds. It depends on the manager, the securities in the fund and what index they follow.

One way investors get around the wash sale rule is to trade stock in for an ETF. For example, if you sell Meta stock at a loss to take advantage of the capital loss carryover, you can then buy a tech ETF that contains Meta. Because they’re not the same type of security, you won’t be committing a wash sale and you can still keep your assets in the tech sector.

Bottom Line

The capital loss carryover is a great resource you can use. It allows for up to $3,000 to be the maximum capital loss allowed to be taken each year, until the total capital loss has been deducted. You can use it as a tool to offset capital gains you’ve received. If you want to be strategic, you can also employ tax loss harvesting to make the most of the tax break. If you feel overwhelmed, turning to a qualified financial advisor can help decide what to do with your money.

Tips for Investing

  • You’re likely to incur losses at some point while investing and when you do it’s important that you make the most of them. Afinancial advisorcan help you manage your investments or to create a long-term investment plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
  • Having the right balance of assets is essential to have a diverse and secure portfolio. SmartAsset’s Asset Allocation Calculator can help you determine where you should put your money depending on your risk profile.

Photo credit: ©iStock.com/PrathanChorruangsak, ©iStock.com/Vladimir Vladimirov, ©iStock.com/FG Trade Latin

What Is a Capital Loss Carryover? Rules, Examples and Definition (2024)

FAQs

What Is a Capital Loss Carryover? Rules, Examples and Definition? ›

Capital loss carryover is the net amount of capital losses eligible to be carried forward into future tax years. Net capital losses (the amount that total capital losses exceed total capital gains) can only be deducted up to a maximum of $3,000 in a tax year.

What is an example of a capital loss carryforward? ›

Example of a Capital Loss Carryforward

Assume the taxpayer sold 1,000 shares of XYZ stock for $10,000 less than their cost basis in the stock. They now have a $10,000 capital loss. If they also had a $2,000 capital gain from selling some other stock, their net capital loss for the year is $8,000.

What is capital loss with an example? ›

A capital loss is the loss incurred when the value decreases for a capital asset, such as an investment or real estate. This loss will not be realised until the asset is sold for a price lower than the purchase price originally.

How does carry over loss work? ›

When a loss is greater than the amount allowed by the tax deduction, it can be carried to the following years. This creates a future tax relief, which essentially increased the income of a future year. Different types of loss can be carried over for different number of years.

How do I know if I qualify for capital loss carryover? ›

If the net amount of all your gains and losses is a loss, you can report the loss on your return. You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.

What qualifies for capital loss? ›

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 you carry forward capital losses for individuals? ›

Capital Losses

If you have an unused capital loss, this can be carried forward indefinitely against gains of future years.

What is a capital loss carryover? ›

Capital loss carryover is the ability to use the capital loss tax deduction over multiple years if the loss is large enough. This means you can use the capital loss to offset taxable income.

How much capital loss can you deduct? ›

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.

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

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

Which losses cannot be carried forward? ›

Speculative Business Loss

Cannot be carried forward if the return is not filed within the original due date.

What is the difference between carryover and carry forward? ›

Carryover is when the balance of unused funds at the end of a Budget Period is transferred (or carried forward) into the following Budget Period. Some sponsors allow automatic carry forward of funds from year to year, others require prior approval.

Do capital losses offset 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.

How does capital loss affect taxes? ›

Can I deduct my capital losses? Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains.

What is the difference between ordinary loss and capital loss? ›

An ordinary loss is fully deductible to offset income thereby reducing the tax owed by a taxpayer. Capital losses occur when capital assets are sold for less than their cost. Taxpayers are allowed to deduct up to a certain limit for capital losses, whereas there is no limit for ordinary losses.

How do you calculate state capital loss carryover? ›

California Capital Loss Carryover Worksheet
  1. Loss from Schedule D (540), line 11, stated as a positive number.
  2. Amount from Form 540, line 17.
  3. Amount from Form 540, line 18.
  4. Subtract line 3 from line 2. ...
  5. Combine line 1 and line 4. ...
  6. Loss from Schedule D (540), line 8 as a positive number.

Which losses can be carried forward? ›

Losses from owning and maintaining race-horses
SectionLosses to be carried forwardTime up to which losses can be carried forward
32(2)Unabsorbed depreciationNo time limit
71BLoss from House property8 years
72Loss from Normal business8 years
73Loss from speculative business4 years
4 more rows
Mar 19, 2024

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 an example of a capital loss and a revenue loss? ›

Loss due to Liquidation of Company : Amount deposited by a person with manufacturing industry to get its agency and lost due to company being liquidated is a Capital Loss.. Loss due to Theft by an employee. : Loss occurring due to theft or embezzlement or misappropriation committed by an employee is revenue loss.

What are the different types of capital losses? ›

There are three types of capital losses—realized losses, unrealized losses, and recognizable losses. Capital losses make it possible for investors to recoup at least part of their losses on their tax returns by offsetting capital gains and other forms of income.

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