What Is a Gross Capital Loss on Your Tax Return?

A gross capital loss represents the total financial loss from selling a capital asset before considering any capital gains. When an investment is sold for less than its purchase price, the result is a gross capital loss. This figure is the first step in a process that involves netting losses against gains and applying deduction limits, which determine the final impact on your tax return.

Identifying and Calculating Gross Capital Losses

A capital asset generally includes property owned for personal use or investment, such as stocks, bonds, and real estate. A gross capital loss occurs when an asset’s selling price is lower than its adjusted basis. The calculation is the sale price minus the adjusted basis.

The adjusted basis starts with the original acquisition cost, including commissions and fees. This basis increases with capital improvements, like a room addition, and decreases with factors like depreciation deductions. An accurate adjusted basis is necessary to determine the correct loss amount.

Losses are categorized by how long you held the asset. A short-term capital loss is from an asset held for one year or less, while a long-term loss is from an asset owned for more than one year. For example, if you bought stock for $5,000 and sold it for $3,000 after ten months, you have a $2,000 short-term loss; if sold after 18 months, it is a long-term loss.

The Netting Process for Capital Gains and Losses

After calculating individual gross capital losses and gains, the next step is the netting process, which combines them in a specific order.

First, net all short-term capital gains and losses against each other to find a net short-term gain or loss. Then, do the same for all long-term capital gains and losses to find a net long-term gain or loss.

If one of these results is a gain and the other is a loss, you net them against each other. For instance, a $4,000 net short-term gain and a $6,000 net long-term loss combine to create a $2,000 net long-term capital loss. If both results are gains or both are losses, they remain separate.

Applying Net Capital Losses on Your Tax Return

Once the netting process is complete, a final net capital loss can be used on your tax return. Your net losses are first used to reduce your capital gains to zero, which can significantly lower your taxable income.

If your net capital losses exceed your total capital gains, you can deduct the remaining loss against other forms of income, such as wages or interest income. There is an annual limit on this deduction of up to $3,000 per year, or $1,500 if you are married and filing a separate tax return.

Any loss that remains after applying these rules is not lost. The excess loss is handled through a carryover provision, which allows it to be used in future tax years.

Handling Loss Carryovers

If a net capital loss exceeds the annual deduction limit of $3,000 ($1,500 for married filing separately), the unused portion can be carried forward to subsequent tax years. This capital loss carryover allows you to use the remaining loss to offset future gains or income.

The character of the loss is preserved when carried over, meaning a short-term loss remains short-term and a long-term loss remains long-term. This carried-over loss is combined with the next year’s gains and losses during that year’s netting process.

Losses can be carried forward indefinitely until fully used. The Capital Loss Carryover Worksheet, found in the instructions for Schedule D (Form 1040), is used to track the amount available for carryover.

Reporting Capital Gains and Losses

Individual transactions are detailed on Form 8949, Sales and Other Dispositions of Capital Assets. This form requires listing the details of each asset sale, including purchase date, sale date, sale price, and cost basis.

Totals from Form 8949 are transferred to Schedule D, Capital Gains and Losses, where the netting process is summarized. Part I of Schedule D is for short-term gains and losses, and Part II is for long-term items.

The calculations on Schedule D determine your net capital gain or loss. If you have a net loss, the form guides you in applying the deduction limit. The final figure is carried over to Form 1040, where it impacts your overall taxable income.