If an investor has a net capital loss for the year, they can deduct up to $3,000 of the capital loss against earned income that year. If this investor made $100,000 from their job, they could deduct $3,000 to bring their taxable income to $97,000. The deduction results in a lower tax obligation.
In this example, $10,000 of the $13,000 net capital loss is leftover. Any leftover portion “rolls over” to the following year, which helps the investor avoid taxes on future gains.
Does this mean that only $3,000 of each year’s cap losses can be deducted for said year but there’s no limit to how much rollover losses (from previous yrs) can be deducted?
1 Like
Yep! You’ve got it, @Mass_coffee_louse. Only $3,000 of net losses can be deducted against other forms of income. Any “leftover” losses roll over to the next year. This occurs annually until the losses run out.
2 Likes
So just to clarify, the following year, would $10,000 be deducted or is it a $3,000 cap all together?
1 Like
The investor had a $13,000 net capital loss for the year. $3,000 was deducted against their earned income, leaving $10,000 of “leftover” losses.
The next year, the investor basically starts with a $10,000 loss. Let’s assume they make no trades the entire year. If so, they’ll deduct another $3,000 against their earned income, leaving $7,000 of “leftover” losses. This would happen on repeat until the “leftover” losses were gone.
Let’s reset and assume the previous paragraph disappears. Alternatively, they could use the $10,000 “leftover” losses to net against gains. For example, let’s assume the following year the investor places a number of trades and ends with a $15,000 net gain. They would net the $10,000 of “leftover” losses from the previous year, resulting in a $5,000 net capital gain. They would pay taxes on the $5,000 net gain, but this is obviously better than paying taxes on a $15,000 gain.
I hope this helps!
3 Likes
Ah, so the $3,000 limit is for deductions against earned income.
Thanks for clarifying
1 Like
Yep - you got it! Glad our discussion was helpful!
2 Likes