Long-Term vs. Short-Term Schedule D Carryover

by Michael Dreiser

The Internal Revenue Service limits the value of both short-term capital losses and long-term capital losses that may be used in any given year to offset ordinary income. The non-deductible portion of short and long term capital losses may be carried forward and deducted in future tax periods, subject to the same limitations.


A capital loss is generated when capital assets, such as stocks, bonds, and investment property, are sold for less than the cost of the investment. On an annual basis, capital losses may be used to offset up to $3,000 of an individual income taxpayer's ordinary income, such as income from salary, wages, or interest income. Capital losses that exceed $3,000 can be carried forward to the taxpayer's future returns indefinitely.

Mechanics of Loss Calculation

Before capital losses can offset a taxpayer's ordinary income, taxpayers must use losses to offset any capital gains. Capital assets that were owned by the taxpayer for more than a year are considered long-term capital assets, while capital assets owned for a year or less are considered short-term capital assets. Short-term capital losses are first used to offset any short-term capital gains. If short-term losses are greater than short-term capital gains, the difference is a net short-term capital loss. Likewise, long-term capital losses are first used to offset any long-term capital gains. Any excess of long-term capital losses over long-term capital gains is a net long-term capital loss.

Carrying Over Losses

Any short-term capital loss that is carried forward from the previous year is added to the year's short-term capital gains and losses in calculating a gain or loss. Likewise, any long-term capital loss carried forward is added with current year long-term capital gains and losses when current year long-term net capital gain or loss is calculated.

Schedule D

When recording capital gains and losses on your taxes, you must use Schedule D, Capital Gains and Losses. The offset against ordinary income, although calculated on Schedule D, is reported on page 1 of Form 1040. Schedule D, however, retains the aggregate amount of loss data necessary to calculate the remaining amount carried forward in future tax periods. Each Schedule D stands on its own, meaning that it is never necessary for a taxpayer to review more than the previous year's Schedule D form.

About the Author

Michael Dreiser started writing professionally in 2010. He is a certified public accountant with experience working for a large New York City accountancy and expertise in areas ranging from private equity taxation to investment management. He holds a Master of Business Administration in international finance from l’École Nationale des Ponts et Chaussées in Paris.

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