Capital Gains & Losses

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Capital Gains and Losses: Capital Losses

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Nine Rules for Capital Losses

  1. Annual deduction limit:
    • The deduction limit for a net capital loss in any one year is $3,000.
  2. Excess loss over $3,000:
    • If a capital loss exceeds $3,000 in any tax year the excess over $3,000 must be carried over to the next tax year.
  3. Carrying over a capital loss:
    • Treat the loss as if it was incurred in the carryover year.
    • Include the carryover loss in the computation of net capital gains and losses incurred in that tax year.
    • A long-term capital loss and short-term capital loss retain their original character as long-term or short-term in the carryover year.
  4. Where to deduct a capital loss:
    • A capital loss is deducted on Form 1040. It serves to reduce other income reported on Form 1040.
  5. Schedule D:
    • Short-term and long-term capital losses (and gains) are reported on Schedule D.
  6. How to deduct capital losses:
    • Start deducting net capital losses from capital gains in the following order:
      • First, reduce any gains subject to the 28% rate (e.g., gains on collectibles and qualified small business stock).
      • Next, use any remaining loss to reduce gains subject to the 25% rate (e.g., unrecaptured Section 1250 gains).
      • Finally, use any remaining loss to reduce gains subject to the lowest capital gains rates, 5% and 15%.
      • If any net capital loss still remains, deduct up to $3,000 from other income reported on Form 1040.
      • If any excess loss over $3,000 remains, carry it over to the next tax year.
  7. Married couples:
    • May only deduct up to $3,000 of net capital losses on a joint return or $1,500 each if filing separate returns.
    • Neither spouse may deduct the other's loss on his/her separate return.
  8. Related taxpayers:
    • A loss on a sale to a related taxpayer may not be deducted.
  9. Deceased taxpayer:
    • If a taxpayer dies and has a capital loss on his/her own property the loss may be deducted up to $3,000 on his/her return (or joint return if married filing filing on the final return).
    • If the loss exceeds the $3,000 limit, the excess over $3,000 is lost forever (it may not be deducted by the estate or carried over by a surviving spouse).