When you sell an investment at a loss, that capital loss can first offset capital gains from the same year — potentially eliminating the tax on those gains entirely. If your losses exceed your gains, you can deduct up to $3,000 of net capital losses against ordinary income (like wages) per year. Any remaining loss carries forward indefinitely — there is no expiration — and applies against future gains and income in subsequent years.
Quick answer: Capital losses offset capital gains first (dollar-for-dollar, any amount). Net losses above gains: deduct up to $3,000 against ordinary income per year. Remainder carries forward forever. Short-term and long-term losses tracked separately. Report on Schedule D. Check your prior-year return for existing carryovers.
How Capital Loss Deductions Work: Step by Step
Step 1: Offset Same-Year Capital Gains
Net your capital losses against capital gains within the same category:
- Short-term losses (held ≤ 12 months) offset short-term gains first
- Long-term losses (held > 12 months) offset long-term gains first
Step 2: Cross-Apply Remaining Losses
If one category has net losses and the other has net gains:
- Excess short-term net losses offset long-term net gains
- Excess long-term net losses offset short-term net gains
Step 3: Deduct Up to $3,000 Against Ordinary Income
If you still have a net capital loss after offsetting all capital gains:
- Deduct up to $3,000 from ordinary income (wages, interest, non-qualified dividends)
- Married filing separately limit: $1,500 each
Step 4: Carry Forward the Remainder
Net capital loss above $3,000 → carries forward to next year as a capital loss.
Example:
| Item | Amount |
|---|---|
| Short-term gains | $5,000 |
| Short-term losses | $22,000 |
| Long-term gains | $8,000 |
| Long-term losses | $3,000 |
Netting step 1:
- Short-term: $5,000 gains − $22,000 losses = −$17,000 net ST loss
- Long-term: $8,000 gains − $3,000 losses = +$5,000 net LT gain
Cross-apply (step 2):
- $17,000 ST loss offset $5,000 LT gain = −$12,000 remaining ST loss
Step 3 — ordinary income deduction:
- Deduct $3,000 against wages
Step 4 — carryover:
- Remaining: $12,000 − $3,000 = $9,000 capital loss carryover
This $9,000 carries to next year as a short-term capital loss carryover.
The $3,000 Ordinary Income Deduction
The $3,000 limit on deducting capital losses against ordinary income has not been updated since 1978. At current income tax rates, the maximum federal tax savings from the $3,000 deduction is:
| Tax Rate | Tax Saved on $3,000 Deduction |
|---|---|
| 10% | $300 |
| 12% | $360 |
| 22% | $660 |
| 24% | $720 |
| 32% | $960 |
| 35% | $1,050 |
| 37% | $1,110 |
Short-Term vs Long-Term Carryover: Why It Matters
The distinction between short-term and long-term carries forward:
| Carryover Type | Offsets First | Tax Rate Impact |
|---|---|---|
| Short-term carryover loss | Short-term gains | Short-term gains taxed at ordinary rates (higher) — offsetting saves more |
| Long-term carryover loss | Long-term gains | Long-term gains taxed at 0%, 15%, or 20% — offsetting saves somewhat less |
A large short-term carryover is especially valuable because it offsets short-term gains (taxed at up to 37%) and reduces ordinary income (up to 37%).
A long-term carryover is still valuable but offsets gains taxed at preferential long-term rates (0–20%).
Tax-Loss Harvesting: Creating Strategic Carryovers
Tax-loss harvesting is the practice of intentionally selling investments at a loss to create capital losses — which then offset current or future gains. Key rules:
The wash sale rule: If you sell a security at a loss, you cannot buy the “substantially identical” security within 30 days before or after the sale without losing the loss deduction. The loss is disallowed and added to the cost basis of the repurchased shares.
Avoid wash sales by:
- Waiting 31 days before rebuying the same security
- Buying a similar (but not identical) ETF or fund immediately — e.g., sell Vanguard Total Market and buy iShares Total Market
- Buying an ETF instead of individual stocks (different securities, even in similar sectors)
When Is a Carryover Most Valuable?
- Year you have large capital gains — carryovers offset gains dollar-for-dollar, saving 15%–23.8% (LTCG rate + NIIT)
- Year of high ordinary income — the $3,000 deduction saves up to $1,110 at the 37% rate
- Year of Roth conversion — coordinate carryover losses with Roth conversion income to reduce net taxable income
- Pre-retirement — burn through carryovers before Social Security begins to keep combined income low
Finding Your Carryover on Your Tax Return
Your capital loss carryover is on last year’s Schedule D, Lines 6 and 14:
- Line 6: Short-term capital loss carryover (to this year)
- Line 14: Long-term capital loss carryover (to this year)
Tax software automatically imports these from the prior year. If you are switching software or filing manually, retrieve the amounts from your prior-year Schedule D or the Capital Loss Carryover Worksheet in the Schedule D instructions.
Related US Capital Gains and Tax Strategy Resources
- Tax-Loss Harvesting Guide — harvesting losses to offset gains
- Wash Sale Rule Guide — the 30-day repurchase restriction
- Capital Gains Tax Rates 2026 — 0%, 15%, and 20% thresholds
- Capital Gains on Home Sale — Section 121 exclusion
- Net Investment Income Tax — 3.8% NIIT on investment income
Tracking your capital loss carryovers accurately each year is one of the simplest tax planning steps available to investors. Review your carryover balance at the start of each year — and plan your investment sales around it to maximise the tax benefit of every dollar of accumulated loss.
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