NOTE: I wrote this post in 2013, but its content is still accurate today.
The following question came up recently:
An investor has a $10,000 capital loss carryforward from prior years. They have $5,000 of capital gains from stock sold this year. How does the loss carryforward work this year?
Tax law places limits on how much a taxpayer can deduct in capital losses each year. The limit is $3,000 of losses per year. Any unused losses beyond $3,000 are carried forward to be used, $3,000-at-a-time, in future years.
For more on stock losses and taxes, see this recent blog post.
Here’s the answer to the question posed at the start of this post.
The taxpayer has $10,000 of unused losses from prior years. These losses off-set all of their current-year capital gains. Plus, the taxpayer can take an additional deduction of $3,000 so that they get to their limit of a maximum of a $3,000 loss deduction for the year year.
So the end result is that their tax return would show a $3,000 capital loss deduction, with $2,000 of unused losses to carry forward to next year.
The $2,000 is arrived at as: $10,000 beginning loss, minus the $5,000 of current-year gains that are essentially “neutralized,” minus the additional $3,000 of capital loss the taxpayer is allowed to take = $2,000 loss remaining to be used in the future.
Image courtesy of David Castillo Dominici / freedigitalphotos.net