When reporting capital gains for tax purposes, investors are allowed to offset some of those gains if they have incurred any capital losses during the year. The Internal Revenue Code allows individual income taxpayers to write off $3,000 worth of capital losses each year. However, if you lost more than $3,000 you can carry over the losses to the next tax year to be written off then. This is formally known as a capital loss carryover.
A capital loss occurs when a taxpayer sells a capital investment, such as a stock, mutual fund or investment property for a net sales price that is less than the taxpayer’s cost or adjusted tax basis. A loss is only allowable for capital investment. Losses related to capital personal property, such as a house or a car that is used by the individual may not be deducted. When the net sales price is less than the taxpayer’s cost or adjusted tax basis (the value the taxpayer may account for the asset under the Internal Revenue Code), the taxpayer has a capital loss.
Capital Loss Limitations
If capital losses exceed your capital gains, you can claim a capital loss deduction, which is reported on line 13 of Form 1040 of your tax return. The capital loss deduction is the lesser of $3,000 ($1,500 if you are married and file a separate return), or your total net loss as shown on line 16 of Schedule D.
If you have a total net capital loss that exceeds the $3,000 annual limit on capital loss deductions, you can carry over the unused part to the next year. There is no limit to the number of years losses can be carried forward. When determining the amount of capital losses to carryover to the next year, you are required to take the current year's allowable deduction into account, even if you didn’t claim it. A long-term capital loss that is carried over to the next tax year will reduce next year’s long-term capital gains before it reduces the short-term capital gains.
Other Investment Expenses
Less commonly, taxpayers may incur additional forms of investment losses other than capital losses, such as investment interest expenses and investment management fees. These costs are deductible as Itemized Deductions to Form 1040. These disallowed investment expenses cannot be carried-forward, with the exception of investment interest expense. Investment interest expense is deductible, as an itemized deduction, up to the amount of investment interest income. Any disallowed investment interest income is carried forward and may be deducted in future tax periods.