According to federal tax rules, any gain on the sale of an asset such as real estate or a stock investment is subject to capital gains tax. On the other hand, a loss on such a transaction is a capital loss, and may be subtracted from gains to arrive at net taxable gain for the year. There's a limit on any deduction you can take for losses, however, and if you exceed that limit you've got a capital loss carryover.
The IRS allows you to deduct a net capital loss for the year, but limits that loss to $3,000. The balance above this limit can carry over to the following year's tax return, and subtracted from any net gain or net loss for that subsequent year. The IRS provides a Capital Loss Carryover Worksheet in the Instructions for Schedule D. Capital losses, like capital gains, are divided into short- and long-term. While any investment held less than a year is considered short-term, assets held longer than a year are long-term. A short-term capital loss carryover can only be applied to a short-term capital gain or loss.
Completing Schedule D
Tax filers report their capital gains and losses on Form 1040, Schedule D. There are other forms used to report capital transactions such as Form 8949 and Form 8824 for "like-kind" exchanges. The short-term net gain or loss from these other reporting forms goes on Schedule D, Line 4. Complete the other items as follows:
- Short-term capital gains and losses from partnerships, S corporations, estates and trusts go on Line 5.
- Any short-term carryover appears on Line 6,
- Long-term carryovers go on Line 14.
- The net capital gain or loss from the year goes on Line 15.
- The calculation of taxes on that net gain or loss is done on Form 1040, Line 13.
Limits and Caveats
There's no limit to the number of years your capital loss carryovers can be carried over. Theoretically, a $30,000 capital loss can continue to reduce your tax bill for 10 years if you have no other transactions over that period, and if the limit of $3,000 in any single year continues to apply. Individual tax payers can't apply a current year's capital loss to a previous year's capital gain--that carryback offset is only allowed to business filers.
- Fool.com: Capital Loss Carryovers Can Cut Your Tax Bill for Years
- 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.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.