How to Handle a Schedule D Loss Carryover

A capital loss carryover occurs when your total net capital losses for a year are greater than the amount you can deduct annually. This provision allows you to carry the excess loss forward to subsequent years to offset future capital gains or, within limits, your regular income. The process involves finding your carryover amount from last year’s return, applying it on this year’s forms, and calculating any remaining loss to carry into the next year.

Determining Your Prior Year Carryover Amount

You must first identify the specific amount you are bringing forward from the prior tax year. This information is not on the main Form 1040 but is calculated on a worksheet in the instructions for the prior year’s Schedule D, Capital Gains and Losses. You will need to locate your copy of last year’s tax return to find the “Capital Loss Carryover Worksheet.” This worksheet details the calculation that determined the amount of loss that exceeded the annual deduction limit.

The worksheet from the prior year provides a breakdown of the carryover into two categories: short-term and long-term losses. A short-term loss results from the sale of an asset held for one year or less, while a long-term loss is from an asset held for more than one year. The worksheet will have specific lines that show the final calculated short-term and long-term capital loss carryover amounts. These two figures are the starting point for completing your current year’s Schedule D.

Accurately transfer these amounts from the final lines of the prior-year worksheet. The worksheet is designed to guide you through the necessary calculations that net your gains and losses and apply the annual deduction limit, so you only need to locate the final figures to carry forward.

Applying the Loss Carryover on Your Current Tax Return

Once you have your short-term and long-term carryover amounts, apply them to your current tax return by entering the figures onto the current year’s Schedule D. The prior-year short-term capital loss carryover is entered on line 6, and the prior-year long-term capital loss carryover is entered on line 14. These entries integrate your past losses with your current year’s investment activities.

After entering the carryover amounts, you combine them with any capital gains or losses from the current year according to a specific order. Short-term carryover losses are first used to offset any short-term capital gains from the current year. Similarly, long-term carryover losses are first applied against current-year long-term capital gains. This step keeps the loss character consistent.

If a net loss remains in one category after this initial offsetting, it can then be used to offset a net gain in the other category. For instance, if you have a remaining short-term loss after offsetting all your short-term gains, you can use that excess loss to reduce any net long-term capital gain. Conversely, a remaining long-term loss can be used to decrease a net short-term capital gain.

If a net capital loss remains for the year after all gains have been offset, you can deduct a portion of it against other forms of income, such as wages. The annual limit for this deduction is $3,000 per year for individuals ($1,500 if married filing separately). This deduction is taken on your Form 1040 and directly reduces your adjusted gross income. Any loss that remains after taking this deduction becomes part of a new carryover to the following year.

Calculating the Remaining Carryover for Future Years

After applying your carryover losses to the current year’s gains and taking the maximum allowable deduction, any remaining loss is not forfeited. The tax code permits you to carry forward these unused capital losses indefinitely until they are fully used. The process of determining the amount to carry forward to the next year requires a specific calculation.

To determine the exact amount and character of the loss to carry into the next tax year, you must complete the “Capital Loss Carryover Worksheet” found in the instructions for the current year’s Schedule D. This is a different worksheet from the one you used to find your initial carryover amount. This new worksheet is part of the current year’s tax forms and establishes the figures for the next year. The worksheet guides you through a calculation that starts with your total net loss for the year.

The worksheet is structured to maintain the distinction between short-term and long-term losses. It calculates how much of your annual deduction was used to offset short-term losses and how much was used against long-term losses. The character of the loss is preserved when it is carried forward. The final lines of this worksheet will provide the precise short-term and long-term capital loss carryover amounts that you will use on the following year’s tax return.