How does a capital loss carryover work?

Where a loss goes, in order

A capital loss is never deducted in one step. It is spent against capital gains first, and only what survives reaches the rest of your income. Section 1211(b) of the Internal Revenue Code sets the sequence for individuals: losses are allowed in full against gains, and any excess comes off other income up to $3,000 a year, or $1,500 for a married person filing a separate return.

The remainder is the carryover. Section 1212(b) moves it into the next tax year, where it counts as a capital loss of that year and goes through the same sequence again. For an individual it never expires: it rolls forward until it is used up, and only the taxpayer's death ends it early.

The $3,000 figure is written into the statute as a plain number. Unlike the brackets and the 0% ceiling, it is not adjusted for inflation, so it covers a little less of a typical income every year.

Netting comes before the offset

Before any loss touches your wages, gains and losses are paired off. Short-term results are netted together, long-term results together, and then a net loss on one side is set against a net gain on the other. The calculation guide walks through that order step by step.

Which side a result lands on depends only on how long you held the asset. More than a year is long-term, counting from the day after you bought it up to and including the day you sold (IRS Topic 409), and a loss keeps that label for as long as it is carried.

Only a net loss for the whole year creates a deduction and a carryover. Lose $20,000 on one fund and make $25,000 on another and there is nothing to carry: the loss has already been used against the gain, which is where a loss does the most good, because it cancels income that would otherwise be taxed.

When the year does end in a net loss, the offset against other income comes out of the short-term side first. Section 1212(b)(2) treats the amount you deducted as a short-term gain when the carryover is worked out, so a mixed loss carries forward with less short-term loss and the same long-term loss. The calculator's engine follows that order, which is also the order of the Capital Loss Carryover Worksheet in IRS Publication 550.

The carryover keeps its character

A short-term carryover arrives in the new year as a short-term loss, and a long-term carryover as a long-term loss (section 1212(b)(1)). Each is netted first against gains of its own kind. The distinction matters because the two kinds of gain are taxed so differently: a short-term carryover that meets a short-term gain cancels income taxed at ordinary rates of up to 37%, while a long-term carryover meeting a long-term gain cancels income taxed at 0%, 15% or 20%.

None of it is optional. The carryover is applied to the first gains that arrive, including gains that would otherwise have been taxed at nothing. A retiree whose gains sit inside the 0% band spends the carryover on gain that was never going to cost anything, and the second example below shows exactly that. There is no election to hold a carryover back for a year when it would be worth more.

The offset against other income works the same way. Every year that ends in a net capital loss takes up to $3,000 of it against wages, pension or interest, whether or not that is the best use of it.

The adjustment for a low-income year

There is one exception, and it protects people with little other income. When the carryover is worked out, section 1212(b)(2) counts the offset as used only up to your adjusted taxable income: broadly, taxable income with the capital loss deduction added back, a negative figure counting as negative. If your income was already too low for the offset to reduce anything, the unused part stays in the carryover.

This calculator does not make that adjustment. It deducts the full offset and carries forward the rest, which understates the carryover for a year in which taxable income before the loss was under $3,000. In that situation the worksheet in the Schedule D instructions gives the right figure.

Married couples share one limit

The limit belongs to the return, not the person. A married couple filing jointly gets one $3,000 offset between them, and filing separately does not double it: each spouse gets $1,500, so the pair reaches $3,000 only if both have a net loss to use.

On a joint return the couple's gains and losses are netted together, so one spouse's loss offsets the other's gain before any limit applies. A capital loss is rarely, on its own, a reason to file separately.

Stock that became worthless

A share that becomes worthless does not have to be sold for its loss to count. Section 165(g) treats a security that becomes worthless during the year as sold on the last day of that tax year, so the loss belongs to that year and, for a calendar-year filer, its holding period runs to 31 December.

The hard part is the year. The loss belongs to the year the security actually became worthless, not the year you noticed, and a claim in the wrong year is a claim that can be refused. Once taken, the loss nets and carries forward like any other.

When a loss is lost for good

Four situations end a loss instead of carrying it. A loss on property you used personally, such as your home or your car, is not deductible at all, so it never becomes a carryover (section 165(c); IRS Topic 409). A capital loss, carryovers included, can be deducted only on the final return of the person who died; IRS Publication 559 is explicit that it cannot pass to the estate.

A sale to a relative is the third. Section 267 disallows a loss on a sale between members of a family, meaning brothers and sisters, a spouse, ancestors and lineal descendants, and between you and a corporation you own more than half of. Selling a losing stock to your daughter produces no deduction, whatever price she pays.

The fourth is a repurchase inside an IRA. Sell shares at a loss and buy the same shares in your IRA or Roth IRA within 30 days, and Rev. Rul. 2008-5 disallows the loss without adding it to any basis. In an ordinary account the same repurchase only postpones the loss, as the wash sale guide explains.

Recording it and carrying it forward

Each sale goes on Form 8949 and the totals on Schedule D, which produces the net figure and the deduction for the year (IRS Topic 409). Nobody sends you the carryover as a number. You work it out from last year's return, using the Capital Loss Carryover Worksheet in Publication 550 or the Schedule D instructions, and enter it on this year's Schedule D.

Keep that worksheet with the return. A large carryover can outlive the records of the sales that created it by many years, and the worksheet is the only document that shows how the short-term and long-term amounts were split.

To see what a loss is worth against a particular sale, use the comparison panel under the calculator's results, which has a field for a realized loss. The calculator takes one sale at a time and has no field for a carryover from an earlier year, so keep that total in your own records.

Worked example

Computed by the calculator's own engine when this page was built. Open the derivation for every rule and citation.

Run your own figures

Nothing you enter leaves your browser.

Related questions

Keep reading

• What is the wash sale rule?The 61-day window, where a disallowed loss goes, and the one repurchase that erases it permanently.
• How is capital gains tax calculated?The seven steps in the order the code applies them, from adjusted basis through to the 3.8% surtax.
• How much capital gain can you realize at 0%?The zero-rate headroom for each filing status at common incomes, and what a tax-free gain can still cost.

The guide index lists every answer page; the state comparison adds the state layer.