Capital loss carryover allows taxpayers to use unused capital losses from one tax year to offset capital gains in future years. If your total net capital loss exceeds the annual deduction limit (currently $3,000 for individuals, or $1,500 if married filing separately), the excess can be carried forward indefinitely until fully used. The carryover retains its character—short-term or long-term—and is applied in the order of short-term losses first, then long-term losses, to offset gains in the following year.
How to Calculate Capital Loss Carryover
- Step 1: Determine your total net capital loss for the year (Schedule D, line 16).
- Step 2: Subtract the allowable deduction ($3,000 for individuals) from the total net loss to find the carryover amount.
- Step 3: Use the Capital Loss Carryover Worksheet (provided in Schedule D instructions) to compute the exact short-term and long-term carryover amounts.
- Step 4: Enter the short-term carryover on Schedule D, line 6, and the long-term carryover on line 14 for the next tax year.
Key Rules
- Order of Use: Short-term capital losses are applied first, followed by long-term losses.
- Carryover Character: The carryover retains its original character (short-term or long-term).
- Joint vs. Separate Returns: If you previously filed jointly and now file separately, the carryover can only be claimed by the spouse who originally incurred the loss.
- Straddles and Section 1256 Contracts: Carryover losses from these positions are treated under the same rules as regular capital losses, including the 60/40 long-term/short-term split for section 1256 contracts.
Example
Bob and Shelly sold securities in 2025, resulting in a $7,000 capital loss. Their taxable income was $26,000. They can deduct $3,000 on their joint return, and the remaining $4,000 is carried over to 2026. If their loss had been only $2,000, they would deduct the full amount with no carryover.
Source:
Publication 550
Schedule D
Disclaimer: Always verify with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.