What happens when you sustain a capital loss of more than $3,000?

TaxGuru · #1 (**permalink**) 01-14-2008, 01:05 PM

The IRS code allows taxpayer's who sustain capital losses in excess of $3,000 to be able to offset these against other capital gains. However, where you have no capital gains to offset these losses, Taxpayers are permitted to deduct $3,000 per year from their tax returns, with the balance carried forward to future years.

These losses are then available to be offset against other capital gains and if none exist, then another $3,000 loss is available for deduction in that year. Currently, the IRS has no restrictions on how many years these losses can be carried forward, so we can safely assume these losses can be carried forward indefinitely until they can be either offset against other future capital gains or until they are fully written off at a rate of $3,000 per year.

donahy · #2 (**permalink**) 02-06-2008, 08:36 PM

Quote:

Originally Posted by TaxGuru

The IRS code allows taxpayer's who sustain capital losses in excess of $3,000 to be able to offset these against other capital gains. However, where you have no capital gains to offset these losses, Taxpayers are permitted to deduct $3,000 per year from their tax returns, with the balance carried forward to future years.

These losses are then available to be offset against other capital gains and if none exist, then another $3,000 loss is available for deduction in that year. Currently, the IRS has no restrictions on how many years these losses can be carried forward, so we can safely assume these losses can be carried forward indefinitely until they can be either offset against other future capital gains or until they are fully written off at a rate of $3,000 per year.

Do I understand correctly that if I have substantial capital gain losses from several years ago, I can deduct $3K per year whether or not I have any capital losses in a given year? If so, where do I show the deduction?
Regards,
Donahy

TaxGuru · #3 (**permalink**) 02-07-2008, 06:08 PM

Yes! You simply carry over the losses from the prior year less $3,000 taken in that year. The balance is carried over to Schedule D. There is no requirement that you need to have capital losses in the following year in order to carryover the prior year losses into the next year.

For example, lets say you sustained losses of $35,000 in 2006, and there were no capital gains to offset these losses, so you are allowed to deduct $3,000 in tax year 2006. The balance of the losses $32,000 ($35,000 - $3,000) are carried forward to year 2007 no matter what your capital gain or loss situation. If there are no capital gains then $3,000 are deductible in Tax Year 2006.

If you have further capital losses lets say, another $10,000, then $3,000 are deductible from the prior years carryover of losses, and the remaining balance from the prior year would now be $29,000 ($32,000-$3,000) and current year losses of $10,000 are combined to yield a total capital losses carryover of $39,000 which are carried over to Tax Year 2007.

The carryover losses are entered on Schedule D, lines 6 and 14 indicating short term or long term carryover losses respectively.