No investor likes to lose money on their investments, but the silver lining is that you can often claim a tax loss on your return and produce some tax savings to offset your losses. However, there's only so much capital loss that you're allowed to claim in a given year, and if your losses exceed that amount, then you'll have to carry them over to future years. Below, you'll learn how to calculate the appropriate amount of capital loss carryovers.
Netting gains and losses
You're allowed to use an unlimited amount of capital losses to offset any capital gains that you incur in the same year. First, you'll separate your gains and losses by holding period, with those on investments you owned for longer than a year in the long-term category and those on investments you owned for a year or less in the short-term category.
If you have a gain in one category and a loss in the other, you can then use the losses to offset the gains. Any net amount remaining stays in its existing category. If you have losses in both categories, then you'll keep them in their respective places in applying the next step.
The $3,000 rule
Once you've offset all your capital gains, you can use an additional $3,000 of capital losses to offset other types of income, such as wages and salaries or investment income. If your losses amount to less than $3,000, then you simply take your remaining losses and have nothing left to carry over.
If your losses exceed $3,000, then you have to look further. If you have short-term capital losses of $3,000 or more, then you'll take all $3,000 from the short-term category. Your carryover amount will therefore be any remaining short-term losses along with all your long-term losses. If you have less in short-term losses, then first use any short-term losses you do have, and then take long-term losses to take you up to the $3,000 total. Any remaining long-term losses in that situation are eligible to carry over.
Remember the carryover
For future years, you'll want to be sure to make notes on how much of your carried-over losses were short-term and long-term. That way, you can offset the appropriate type of capital gains in future years and maximize your tax savings.
Carrying over capital losses can be an added hassle, but it can also enhance your tax savings. As painful as losses are, getting a tax benefit is at least partial payback.
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