If you make an investment that loses money, you might be able to declare a loss of income on your personal income tax return. Although there are limits on the type of investment that qualifies and how much you're allowed to claim as a loss, you can move forward a portion of these losses to future years. This is called a capital loss carry forward.
Carry Forward Limits
In 2011, taxpayers can claim $3,000 in capital losses on their income taxes. These losses are reported on Form 1040's Schedule D. If your losses exceed $3,000, you can carry forward the remaining balance every subsequent year until the loss is fully reported. According to the California CPA Foundation, the capital loss carry forward limit hasn't changed since 1977. But if it changes in the future, you might be able to deduct more than $3,000.
Losses on investments such as stocks and bonds can be deducted. Using the capital loss carry forward to reduce taxation on future investment gains is a common technique that can save considerable tax dollars. Be sure to keep careful records, because before you can take the deduction you'll need to show the Internal Revenue Service what the investment was, when you purchased it, and how much it cost.
Not every capital loss can be deducted this way. For example, losses on personal property such as your car or residence cannot be deducted.
How to Calculate Your Carry Forward
Calculating how much you have to carry forward is simple. For example, imagine that in 2011 you sell $6,000 worth of stock that you purchased in 2008 for $10,000, resulting in a loss of $4,000. You can claim a maximum of $3,000 on this year's income tax return, and carry forward $1,000 in losses to next year.
Now, imagine that your loss is $21,000. Assuming the current legislation doesn't change, you will be able to deduct $3,000 in capital losses for each of the next seven years, until the loss is entirely reported.
Capital Gains Carry Forward
When you sell an asset for more than you paid for it, it's a capital gain. The carry forward option is generally not available for capital gains, although installment sales may be reported over several years. Instead, capital gains are reported as either short- or long-term, also on Form 1040's Schedule D. Short-term capital gains are reported on assets that were held for less than one year, and long-term gains are reported for assets sold after more than a year. How much you're taxed depends upon these factors, as well as on what type of asset you sold.
- CalCPA: How Long Can I Carry Forward Capital Losses? Loella Haskew
- Internal Revenue Service: Topic 409 -- Capital Gains and Losses
- Internal Revenue Service: Publication 550
- IRS. “Topic No. 703 Basis of Assets.” Accessed October 18, 2020.
- IRS. "Topic No. 409 Capital Gains and Losses." Accessed October 18, 2020.
- IRS. “Publication 544: Sales and Other Dispositions of Assets,” Pages 34–36. Accessed October 18, 2020.
- IRS. "Capital Gains and Losses – 10 Helpful Facts to Know." Accessed October 18, 2020.
- IRS. “2019 Instructions for Schedule D,” Pages D-14–D-15. Accessed October 18, 2020.
- IRS. “Publication 550, Investment Income and Expenses,” Page 66. Accessed October 18, 2020.
- Social Security. “Income Taxes on Social Security Benefit.” Accessed October 18, 2020.
Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.