What Is the Maximum Capital Loss Deduction?

When you sell a capital asset for less than you paid for it, you incur a capital loss. Capital assets include investments like stocks, bonds, and real estate. These losses can be used to reduce your taxable income, but the amount you can deduct each year is subject to specific limits.

The Maximum Deduction Limit

The maximum capital loss you can deduct against your ordinary income is $3,000. This limit applies to most taxpayers, including those with single, married filing jointly, or head of household filing statuses. This deduction directly reduces other forms of income, such as wages or salaries, lowering your overall tax bill for the year.

A different limit applies to individuals who are married but file separate tax returns. For those using the married filing separately status, the maximum annual capital loss deduction is cut in half to $1,500.

For example, if you have a net capital loss of $8,000 for the year and your filing status is single, you can use $3,000 of that loss to reduce your taxable income. The remaining $5,000 is not lost but is subject to carryover rules.

Determining Your Net Capital Loss

To calculate your net capital loss for the year, you must follow a specific netting process. The first step is to separate your transactions based on how long you held the assets. Assets held for one year or less generate short-term gains and losses, while assets held for more than one year result in long-term gains and losses.

You begin by netting your short-term gains against your short-term losses and your long-term gains against your long-term losses. The final step is to net these two results against each other. If you have a net loss after this final calculation, that figure is your net capital loss for the year.

The wash-sale rule prevents you from claiming a loss if you sell a security and purchase the same or a “substantially identical” one within 30 days before or after the sale. If a loss is disallowed by this rule, it is instead added to the cost basis of the new replacement security.

If a stock or bond becomes completely worthless during the year, it is treated as if it were sold on the last day of that tax year. This timing determines whether the resulting capital loss is short-term or long-term, based on your original purchase date.

Using the Capital Loss Carryover

If your net capital loss exceeds the annual deduction limit, the excess amount is not lost. The tax code allows you to carry the unused portion of the loss forward to future tax years as a capital loss carryover.

The character of the loss, whether it is short-term or long-term, is preserved when it is carried forward. In future years, the carried-over loss must first be used to offset gains of the same character. For instance, a long-term capital loss carryover will first be applied against any long-term capital gains in the following year before it can be used against short-term gains.

Consider a taxpayer with a net capital loss of $10,000. In the current year, they would deduct $3,000 against their ordinary income, and the remaining $7,000 would be carried over to the next tax year. In that subsequent year, the $7,000 carryover loss would first be used to offset any capital gains, and if any loss remains, up to $3,000 could then be deducted against ordinary income.

Reporting Losses on Your Tax Return

You report these transactions on Form 8949, Sales and Other Dispositions of Capital Assets. This form requires the details of each asset sale, including the description, dates of acquisition and sale, sales price, and cost basis.

The totals from Form 8949 are summarized on Schedule D, Capital Gains and Losses. This form is where the final netting of short-term and long-term gains and losses occurs to calculate your net capital loss for the year.

The final deductible loss from Schedule D is transferred to Form 1040. The capital loss deduction is reported on line 7, where it helps determine your adjusted gross income.