Sec 10.2 Rollover Capital Losses

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?

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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.


So just to clarify, the following year, would $10,000 be deducted or is it a $3,000 cap all together?

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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!


Ah, so the $3,000 limit is for deductions against earned income.

Thanks for clarifying

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Yep - you got it! Glad our discussion was helpful!