For tax purposes, capital losses are either long-term or short-term. If you hold an asset, like stock, for:

  • More than one year before you dispose of it (sell it or trade it) for less then the purchase price, your capital loss is long-term
  • One year or less before you dispose of it for less than the purchase price, your capital loss is short-term

Unlike capital gains, you don't have to use or report capital losses in the tax year they happen. You can carry over losses to later years.

Capital Losses

Capital losses - losses from transactions involving property - are part of your gross income. So long as the loss happens as part of your trade or business, or in a transaction for profit, you can deduct the loss from gross income. Buying land as an investment, or stock, and later selling it for less than what you paid for it are good examples.

The Deduction

Once you know you have a capital loss from trade or business or a transaction for profit, you need to determine how much of the loss is deductible. It may or may not be limited.

Full Deduction

You can deduct the full amount of capital losses when your capital gains are more than your capital losses during a single tax year.

For example, say in 2010 you had long-term gains of $2,000, long-term losses of $3,000, short-term gains of $4,000 and short-term losses of $2,000. You can deduct all long-term and short-term losses on your 2010 return because your total gains ($6,000) were greater than total losses ($5,000).

Limited Deduction

Your deduction is limited - you can't take the full deduction - if your capital losses are more than your capital gains for the tax year. When this happens, you may deduct losses up to the amount of your gains, plus the lower of:

  • $3,000 ($1,500 in the case of a husband or wife filing a separate return)
  • The difference between capital losses and capital gains

Capital Loss Carryover

If your losses exceed the deductible amount, you can turn to the carryover rules. They let you use the unused part of your loss to the next tax year. If part of the loss is still unused, you can carry it over to later years until it's completely used up.

For example, assume in 2010 you were single, had more than $33,000 in taxable income, a short-term loss of $1,500, and a long-term loss of $10,500. Your 2010 deduction is limited to $3,000. But:

  • In 2011, you can carryover $9,000 in long-term loss ($10,500 + $1,500 - $3,000). If you have no capital gains in 2011, your deduction is again limited to $3,000
  • In 2012, your carryover loss is $6,000. If you have a capital gain of $3,000 in 2012, you can deduct all of the carryover loss ($6,000) that year

Knowing how and when to claim deductions for capital losses can have a big impact on your taxes, maybe the difference between owing taxes and getting a refund. Check the IRS materials carefully, especially the carryover worksheet. If you have any questions, talk to a professional tax preparer or a tax lawyer before you file.

Questions for Your Attorney

  • Is it ever a good idea to take a capital loss on purpose?
  • Is there a limit to the number of years a capital loss can be carried forward?
  • Who takes the capital loss deduction if a married couple divorces and the property sold that generated the loss was owned by both of them?