What Is a Capital Loss Carryover?

A capital loss carryover is a way to use losses realized on investments to offset taxes on gains made from other investments. When a taxpayer realizes a capital loss, it can be used to reduce the amount of taxes they owe on any capital gains realized from other investments. This can be done in the current tax year or the taxpayer can carryover the loss to be used in future tax years.

How Do Capital Loss Carryovers Work?

A capital loss carryover would typically work as follows: Let’s say a taxpayer realizes a capital loss on an investment, such as when they sell a stock for a lower price than they purchased it. The taxpayer can then use the capital loss to offset any capital gains realized from other investments. Basically the capital loss carries over to the new tax year or any future tax year allowing the taxpayer to reduce their tax liability. Keep in mind that capital losses cannot be used to offset ordinary income.

Example of a Capital Loss Carryover

Let’s say that a taxpayer realized a $2,000 capital loss in the current tax year on a stock they sold. However, they also realized a $4,000 capital gain from selling some of their bonds. In this case, the taxpayer could apply the $2,000 capital loss to the $4,000 capital gain, reducing their taxable income to $2,000. The remaining $1,000 of capital loss could then be carried over and used in future tax years to reduce any capital gains.

Conclusion: Benefits of Capital Loss Carryovers

A capital loss carryover can provide a taxpayer with significant tax savings by allowing them to offset some or all of their capital gains. This allows them to reduce their tax liability but only for capital gains realized from other investments. Since capital losses can only be used to offset capital gains, they should not be used to offset ordinary income.