Capital Losses

The almost inevitable natural consequence of investing in the stock market is that sometimes you’ll have losses. Losses are deductible against gains. What if you have losses that exceed your gains? Let’s say that this year, with all your stock market transactions, you have $10,000 of gains and $30,000 of losses. From a tax point of view, the $10,000 of gains are offset by the $30,000 of losses, leaving you a net $20,000 of losses in excess of gains for the year. 

The way the tax law works is that you can write off $3,000 per year of such excess (or carry-over) capital losses against any other income (for instance salaries, interest or dividends and the like) until you use up the capital loss carry-over. In any future year where you might have capital gains, the past capital loss carry-overs are used to offset those subsequent capital gains, to the extent there are losses available. Again, whatever losses remain unused against capital gains are eligible for $3,000 a year usage against other income. 

Perhaps you’ll get some comfort in knowing that you can carry-over these capital losses, using them up at the rate of $3,000 per year, for a very long time. There is no limit to the number of years to carry it forward – other than your life. When you die, the losses die with you. For joint returns, at least you have the ability to continue to write them off on the life of the survivor of the two, until he/she dies. Note that as to these capital losses, there is no such thing as the ability to carry them back – that is to write them off against years prior to when you incurred the loss.