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Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
Fact checked by Fact checked by Ariel CourageAriel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.
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.
Net capital losses exceeding the $3,000 threshold may be carried forward to future tax years until exhausted. There is no limit to the number of years there might be a capital loss carryover.
Capital loss carryovers allow a taxpayer to capture losses from one period and use them in a future income tax period. Capital loss tax provisions lessen the severity of the impact caused by investment losses.
However, the provisions do not come without exceptions. Investors must be careful of wash sale provisions, which prohibit repurchasing an investment within 30 days of selling it for a loss. If a repurchase occurs, the capital loss cannot be applied toward tax calculations and is instead added to the cost basis of the new position, lessening the impact of future capital gains.
Tax-loss harvesting provides a means of improving the after-tax return on taxable investments. It is the practice of selling securities at a loss and using those losses to offset taxes from gains from other investments and income.
Depending on how much loss is harvested, losses can be carried over to offset gains in future years. Tax-loss harvesting often occurs in December, with Dec. 31 being the last day to realize a capital loss.
Taxable investment accounts identify realized gains generated for the year, so the investor seeks to find unrealized losses to offset those gains. Doing so allows the investor to avoid paying as much in capital gains tax. If the investor wants to repurchase the same investment, they must wait 31 days to avoid a wash sale.
For example, suppose a taxable account currently has $10,000 of realized gains that were made during the calendar year, yet, within its portfolio is ABC Corp stock with an unrealized loss of $9,000.
The investor may decide to sell the stock prior to the end of the year in order to realize the loss. If the ABC Corp stock was sold on or prior to Dec. 31, the investor would realize $1,000 ($10,000 gains - $9,000 ABC Corp loss) in capital gains. Abiding by the wash-sale rule, if the stock was sold on Dec. 31, the investor would need to wait until Jan. 31 to repurchase it.
An individual's capital loss carryover expires at their death. However, it can be put to use in the final tax return filed for that person.
To begin offsetting within the same tax year, you must subtract any capital losses from any capital gains you have in the year in question.
Accordingly, if you have both capital gains and losses in a given year, you should use the losses to reduce or completely wipe out your taxable capital gains for that year. If your capital losses for the year are greater than your capital profits, you can carry the unused losses forward to subsequent tax years.
In those subsequent years, you can claim a capital loss carryover when you have capital losses that exceed your capital gains in that given tax year. In general, you can carry capital losses forward indefinitely, either until you use them all up or until they run out.
Carryovers of capital losses have no time limit, so you can use them to offset capital gains or as a deduction against ordinary income in subsequent tax years until they are exhausted.
Keep in mind there may be restrictions on how much of a loss you can claim in a given tax year, even though you can carry over capital losses. Beyond these limits, any excess losses may be carried over to subsequent years.
To claim a capital loss carryover, you first need to determine the carryover amount. Figure out the entire amount of capital losses from prior tax years that you are eligible to carry forward. When your capital losses have been neutralized against capital gains from prior years, this should be the remaining amount.
To record your capital gains and losses in your current year tax return, use Schedule D (Capital Gains and Losses) on Form 1040 of your tax return. Give the essential details regarding the sales or disposal of assets such as the dates of purchase and sale, the amount of the revenues, and the assets' cost or basis.
For any spreadsheets or specific parts pertaining to capital loss carryovers, refer to the instructions included with Schedule D. These instructions explain the process of calculating the carryover amount and assist you in determining the tax deduction that can be claimed. This worksheet is discussed more in depth in the following section.
As soon as you have calculated the amount of the capital loss carryover, transfer that amount to the correct line on your tax return. This may differ based on the exact tax form you are utilizing and the IRS guidelines provided for that specific tax year. Refer to the tax form's instructions for the specific lines.
It's important to keep accurate records and documentation of your capital losses and carryovers, including any evidence that the initial losses and carryover computations were made correctly. This will be helpful if the IRS audits you or if you need to refer to the data for upcoming tax years.
To keep track of capital loss carryovers, the IRS provides a worksheet or form within the Schedule D instructions. This worksheet typically helps you calculate and document the amount of capital loss that you can carry over from one tax year to the next.
It may involve calculations based on the specific details of your capital gains and losses, such as the type of assets sold, the holding period, and any applicable limitations or adjustments.
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A similar type of worksheet is also provided within Publication 550 (Investment Income and Expenses). Be mindful to always review the most recent year's worksheet, as changes in legislation may change the calculations that impact the amount of carryover you're permitted to take.
Any excess capital losses can be used to offset future gains and ordinary income. Using the previous example, if ABC Corp stock had a $20,000 loss instead of $9,000 loss, the investor would be able to carry over the difference to future tax years.
The initial $10,000 of realized capital gain would be offset, and the investor would incur no capital gains tax for the year. In addition, $3,000 can be used to reduce ordinary income during the same calendar year.
After the $10,000 capital gain offset and the $3,000 ordinary income offset, the investor would have $7,000 of capital losses to carry forward into future years. Carrying losses forward is not restricted to the following tax year. Losses can be carried forward into future years until exhausted.
To calculate a capital loss carryover, subtract your capital gains from your capital losses in a tax year. If losses exceed gains, the excess amount is the carryover. Then, in subsequent years, reduce this balance by the amount of the carryover loss used to offset the capital gains or ordinary income for that specific year.
Capital losses can be carried forward indefinitely until fully utilized or exhausted. There is no expiration date for capital loss carryovers.
Yes, capital loss carryovers can be used as a deduction against ordinary income or to offset capital gains.
Yes, you can. Capital losses from one asset class can be used to offset capital gains from another asset class, helping to reduce your overall tax liability.
If you skip a year of filing taxes, your capital loss carryovers remain available for future use. They can be utilized in subsequent tax years as long as you properly report the carryover on the appropriate tax return.
A capital loss carryover allows for the offset of capital gains or deduction against ordinary income in future tax years with unused capital losses from previous years.
When an individual or business incurs capital losses that exceed their capital gains in a given tax year, the excess losses can be carried forward to future years. This allows taxpayers to utilize the losses in subsequent years, reducing their taxable income and potentially lowering their overall tax liability.
Correction—Sept. 20, 2023: A previous version of this article mistakenly stated that capital loss carryovers could only be used to offset capital gains. It has been edited to reflect that capital loss carryovers may also be used as a deduction against ordinary income.
Correction—Nov. 5, 2023: This text has been corrected to reflect that a decedent’s capital loss is deductible only on their final income tax return and can’t be carried over to their heirs.
