Capital Loss Carryover

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Capital Loss Carryover: Definition, Rules, and Example

What it is

A capital loss carryover lets you apply unused capital losses from one tax year to future years. If your capital losses exceed capital gains in a year, you can:

  • Offset up to $3,000 of the remaining loss against ordinary income each year ($1,500 if married filing separately).
  • Carry any leftover loss forward indefinitely until it’s used up.

Key points

  • Capital gains and losses are netted by holding period: short-term (assets held one year or less) and long-term (more than one year).
  • Long-term losses are first applied against long-term gains; short-term losses against short-term gains. Net results are then offset against each other.
  • After netting gains and losses, up to $3,000 of any remaining net loss may be used to reduce ordinary income annually.
  • Unused losses beyond the annual limit carry forward with no time limit.
  • Certain losses (for example, losses on personal-use property, or some related-party transactions) are not deductible.

How it works (order of application)

  1. Net short-term gains against short-term losses.
  2. Net long-term gains against long-term losses.
  3. If one side still shows a net loss, net that against the other side (long-term loss against short-term gain, or vice versa).
  4. If a net loss remains after all offsets, up to $3,000 can reduce ordinary income in that year ($1,500 if married filing separately).
  5. Any remaining loss carries forward to subsequent years and follows the same ordering rules each year.

Example

You sold an investment for $6,000 with an adjusted basis of $11,000: loss = $5,000.
* If you had $1,000 in capital gains that year:
* $1,000 of the loss offsets the gains.
* You may use up to $3,000 of the remaining $4,000 to offset ordinary income.
* The leftover $1,000 is carried forward to the next tax year.

The wash sale rule

  • A wash sale occurs when you sell a stock or security at a loss and buy a “substantially identical” security within 30 days before or after the sale.
  • Losses from wash sales are disallowed for deduction. The disallowed loss is added to the basis of the newly acquired security.
  • The 30-day restriction applies to transactions by you and your spouse and can extend to certain acquisitions by related parties.
  • This rule prevents immediate tax-loss harvesting by repurchasing essentially the same investment.

Calculating and reporting carryovers

  • Capital gains and losses are reported on IRS Form 8949 and summarized on Schedule D.
  • The IRS provides worksheets (see Publication 550) to calculate carryovers and track the unused loss each year.
  • Special rule for married couples: a carryover generated by a joint return can be deducted only by the spouse who incurred the loss if the couple later files separate returns. The annual deduction limit for married filing separately is $1,500.

Practical considerations

  • Keep accurate records of purchase dates, costs (adjusted basis), and any basis adjustments from disallowed wash sale losses.
  • Carryovers do not expire, but you must apply them correctly each year following netting order and annual limits.
  • If unsure about timing, reporting, or interaction with other tax rules, consult a tax professional.

Sources

  • IRS — Topic No. 409: Capital Gains and Losses
  • IRS — Publication 550, Investment Income and Expenses
  • IRS — Form 8949 and Schedule D