How Much Capital Loss Can You Deduct on Your Taxes?
Understand how capital loss deductions work, including limits, offsets, and how to carry losses forward to future tax years.
Selling investments at a loss can be disappointing, but those losses may offer some relief on your taxes. The IRS allows taxpayers to use capital losses to reduce their taxable income, potentially softening the financial impact of underperforming assets.
Understanding how these deductions work helps in making the most of them. Here’s what you need to know about using capital losses on your tax return.
Annual Deduction Rules
If your investment sales result in a net capital loss for the year—meaning your total capital losses exceed your total capital gains—the Internal Revenue Service limits how much you can deduct against other income, like wages or interest. Generally, taxpayers cannot deduct more than $3,000 of net capital losses against other income types in a single tax year, according to the Internal Revenue Code Section 1211. This $3,000 cap applies if your filing status is Single, Married Filing Jointly, Head of Household, or Qualifying Surviving Spouse.
For married individuals filing separate tax returns, the annual deduction limit against other income is halved.1Internal Revenue Service. Program Manager Technical Advice on IRC Section 1211(b) Capital Loss Limitation Each spouse can deduct up to $1,500 of their net capital loss against other income on their separate return.
Offsetting Gains
Before deducting any capital loss against your ordinary income, you must first use those losses to offset any capital gains realized during the same tax year. This netting process is detailed on Schedule D (Form 1040), Capital Gains and Losses.2Internal Revenue Service. Topic No. 409 Capital Gains and Losses
The first step involves separating gains and losses based on how long you held the assets. Assets held for one year or less generate short-term capital gains or losses, while assets held for more than one year result in long-term gains or losses.
You must net short-term losses against short-term gains and, separately, net long-term losses against long-term gains. This determines if you have a net short-term gain or loss and a net long-term gain or loss.
If you have a net loss in one category and a net gain in the other, you use the loss to offset the gain. For example, a $5,000 net short-term loss combined with a $7,000 net long-term gain results in a final net long-term capital gain of $2,000. Only after this offsetting process is complete can any remaining net capital loss be applied against other income, up to the annual limits.
Applying Carryforwards
When your net capital loss exceeds the annual deduction limit ($3,000 or $1,500), the excess is not lost. Under Internal Revenue Code Section 1212, you can carry the unused portion forward to subsequent tax years.3Internal Revenue Service. Revenue Ruling 2012-29 on Capital Loss Carryovers (IRC Section 1212) This capital loss carryover allows you to apply past losses against future capital gains and, potentially, against ordinary income within the yearly limits.
The character of the loss—short-term or long-term—is preserved when carried forward.4Internal Revenue Service. Topic No. 409 Capital Gains and Losses A short-term loss remains short-term, and a long-term loss remains long-term in the following years, as detailed in IRS Publication 550, Investment Income and Expenses. This distinction matters for future netting against gains.
There is generally no limit on the number of years you can carry forward an unused capital loss. You continue carrying it forward until it’s fully used. Each year, apply the carryforward loss by first offsetting capital gains (matching short-term with short-term and long-term with long-term, then netting across categories if needed). Any remaining net loss can then be deducted against other income, up to the annual limit.
You must apply the allowable deduction each year it’s available. You cannot skip a year to save the loss for later. The Capital Loss Carryover Worksheet in the Instructions for Schedule D helps calculate the amount and character of the loss carrying over to the next tax year.
Reporting Steps
Properly reporting capital gains and losses involves specific forms. Start by detailing each transaction on Form 8949, Sales and Other Dispositions of Capital Assets.5Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets For each sale, list the asset description, acquisition date, sale date, sale proceeds, and cost basis. This information is typically found on Form 1099-B, provided by your broker.
Form 8949 separates transactions based on holding period: Part I for short-term (held one year or less) and Part II for long-term (held more than one year). Transactions are further categorized based on information from your Form 1099-B, such as whether the cost basis was reported to the IRS.
After completing Form 8949, transfer the subtotals for short-term and long-term gains and losses to Schedule D (Form 1040).6Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses Schedule D summarizes these figures and calculates your overall net capital gain or loss for the year.
The final net capital gain or loss from Schedule D is reported on your main tax return, Form 1040 (or Form 1040-SR/1040-NR). A net gain typically increases taxable income, while a deductible net loss decreases it, reported on line 7 of Form 1040 according to IRS guidance.7Internal Revenue Service. Instructions for Schedule D (Form 1040) Both Form 8949 and Schedule D must be attached to your tax return. Maintaining accurate records throughout the year is essential for this process.