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Can A Capital Loss Carryover To The Next Year?

Capital Loss Carryover Can Be Used Against Future Gains


How to Use a Capital Loss CarryOver

Losses are never good. You can make the best of them by using them on your tax return.

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Yes, capital losses can carryover to future tax years. Here's how it works.

First, capital losses are used to offset capital gains.


Example: If you have a $10,000 capital loss, and a $10,000 capital gain, they will offset each other.


Second, $3,000 of a capital loss can be used to offset ordinary income.


Example: If you have a $10,000 capital loss and no gains, you can use $3,000 of the capital loss to deduct against ordinary income.
If your ordinary income is $50,000, you will get to deduct the $3,000 of capital loss and so you will only pay tax on $47,000 of ordinary income.


Third, any capital loss that is not used in the current year can be carried over indefinitely to offset future capital gains.


Example: If you have $10,000 of capital loss, after using $3,000 to offset ordinary income, $7,000 will carryover to the next year.
Next year, if you have $5,000 of capital gain, you can use $5,000 of your loss carryover to offset this gain, and use the remaining $2,000 to offset ordinary income.


Sometimes it makes sense to realize a capital loss on purpose so you can use it to offset ordinary income in future years. This is referred to as tax loss harvesting.

Ordinary income is taxed at a higher tax rate than capital gains, so carrying your capital loss forward and using it against ordinary income in the future may provide a bigger benefit to you. It all depends on your individual tax situation.

With the now permanent zero percent tax rate that applies to capital gains for those in the 10% and 15% tax brackets, it can also make sense to harvest capital gains so that no tax is paid on them. A good accountant can help you figure out if this makes sense.

Keeping Track of Capital Loss Carryover

Capital gains and losses are reported on Schedule D and Form 8949. When reported correctly these forms will help you keep track of any capital loss carryover. Learn more in Reporting Capital Gains and Losses on Schedule D and Form 8949.

Of course, there are additional rules that apply when you dig into short term gains vs. long term gains, and whether deductions can be used to offset state income. You can find additional information at Essential Tax Tips for Capital Gains and Losses.

And of course when it comes to taxes it is always wise to seek a qualified tax adviser to determine answers for your specific situation.

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