Can Corporations Deduct Capital Losses Against Gains?

Yes, corporations can deduct capital losses against gains, but only against capital gains in the same tax year. A C-corporation cannot use any part of a net capital loss to reduce ordinary business income the way an individual can. Unused losses carry back three years and then forward five, and anything still unabsorbed after that window is gone.¹

The Core Rule

A corporation’s capital losses are deductible only up to the amount of its capital gains for the year.¹ If a corporation sells stock at a $500,000 loss but has only $300,000 in capital gains, the remaining $200,000 provides no tax benefit that year. It cannot offset revenue from sales, services, or any other operating income.

Individuals get a small cushion here: they can deduct up to $3,000 of net capital losses against ordinary income each year.² Corporations get no such cushion. The loss either absorbs capital gains, or it waits.

How the Carryback and Carryforward Work

When a corporation ends the year with a net capital loss, the unused amount doesn’t disappear. The tax code requires the loss to go back three years first, applying against capital gains in those earlier years. Anything still unabsorbed carries forward up to five years.³

The carryback goes to the earliest year first. A net capital loss in 2026 goes first to 2023, then 2024, then 2025. At each stop, it offsets capital gains in that year, and the corporation files Form 1139 for a quick tentative refund or Form 1120-X as an amended return to claim the reduction.⁴ One limit worth flagging: the carryback cannot create or increase a net operating loss in the year it’s applied to.³

Any remaining loss then moves forward, year by year, for up to five years. If the corporation can’t produce enough capital gains across the entire eight-year window, the leftover expires permanently.

A detail that trips people up: corporate net capital losses carried to another year are always treated as short-term capital losses, regardless of whether the original asset was held long-term.³ Corporations pay the same rate on short-term and long-term gains, so the dollar amount doesn’t change, but the reclassification matters for recordkeeping and for completing Schedule D (Form 1120) correctly.⁵

Business Property Is Different

Many corporate assets that feel like capital assets actually fall under a different and more favorable set of rules. Property used in a trade or business and held for more than a year is Section 1231 property, and losses on these assets don’t get trapped by the capital loss limitation.

When a corporation’s Section 1231 losses exceed its Section 1231 gains for the year, the net loss is treated as an ordinary loss. That means it reduces taxable income from operations directly, which is exactly what regular capital losses can’t do. The statute explicitly says the capital loss limitation under Section 1211 does not apply when determining whether Section 1231 losses exceed gains.⁶

Qualifying property includes depreciable equipment, real estate used in the business, livestock held for draft or breeding purposes, and certain timber and mineral rights. These transactions go on Form 4797 rather than Schedule D.⁷ The flip side: when Section 1231 gains exceed losses, the net gain is taxed as a long-term capital gain. Business property effectively gets ordinary loss treatment when things go badly and capital gain treatment when they don’t.

Getting the classification right matters. A corporation that mistakenly reports a Section 1231 loss as a capital loss can miss an immediate deduction against operating income and lock the loss into the far more restrictive carryback and carryforward regime.

Worthless Securities

When a corporation holds stock or bonds in another company that become completely worthless, the loss is generally treated as a capital loss.⁸ It’s calculated as if the security were sold for zero on the last day of the tax year, and it can only offset capital gains, subject to the same carryback and carryforward rules.⁹

An important exception exists for affiliated subsidiaries. If the parent owns stock meeting the requirements of Section 1504(a)(2), meaning at least 80% of voting power and 80% of total stock value, and the subsidiary earned more than 90% of its gross receipts from active business sources rather than passive income like dividends, rents, or royalties, the loss on the worthless subsidiary stock is treated as an ordinary loss instead.¹⁰¹¹ An ordinary loss offsets operating income dollar for dollar, with no need to find matching capital gains.

Proving worthlessness is where most claims run into trouble. The IRS requires the corporation to permanently surrender all rights in the security and receive nothing in exchange.⁹ A security that still trades for pennies isn’t worthless. A company in bankruptcy may not be worthless yet if creditors might recover something. Documentation of the identifying event, a bankruptcy discharge, a dissolution, a regulatory shutdown, is what makes the deduction stand up.

Losses That Get Disallowed Entirely

Two rules can take a real economic loss off the table completely, and both catch corporations that don’t plan around them.

Related-Party Sales

Corporations cannot generate a deductible capital loss by selling assets to related parties. If a corporation sells property at a loss to an individual who owns more than 50% of its outstanding stock, the loss is disallowed.¹² This applies even if the sale price reflects fair market value and the transaction is entirely legitimate.

The rules reach broadly, covering sales between a corporation and its controlling shareholder, between two corporations under common ownership, and between a corporation and a partnership sharing the same owners. Ownership is measured both directly and indirectly, so transactions routed through family members or controlled entities don’t dodge the rule.

The disallowed loss isn’t always permanently lost. If the related buyer later sells the property to an unrelated third party at a gain, the previously disallowed loss reduces the buyer’s recognized gain on that later sale. If the related buyer sells at a loss instead, the original disallowed loss is never recovered.

Wash Sales

The wash sale rule applies to corporations, not just individuals. If a corporation sells a security at a loss and buys substantially identical stock or securities within 30 days before or after the sale, the loss is disallowed.¹³ The only exception is for dealers in securities who sustain the loss in the ordinary course of business.

The disallowed loss isn’t lost permanently. It gets added to the cost basis of the replacement securities, deferring the benefit until those shares are eventually sold. But for a corporation trying to harvest a capital loss in a specific tax year, any repurchase of the same or substantially identical investment inside the 61-day window kills the current-year deduction.

Ownership Changes Can Cap the Carryforward

Corporations with unused capital loss carryforwards face an extra risk if they undergo a significant ownership change. When shareholders owning 5% or more of a corporation’s stock increase their combined ownership by more than 50 percentage points within a three-year period, the corporation’s ability to use pre-change losses becomes severely restricted.¹⁴

Section 382 is best known for net operating losses, but Section 383 extends the same framework to capital loss carryforwards. After an ownership change, the amount of pre-change capital losses usable in any post-change year is capped at the corporation’s stock value immediately before the change multiplied by the long-term tax-exempt rate.¹⁵ For a corporation with $10 million in stock value and a long-term tax-exempt rate around 4%, the annual cap would be roughly $400,000, even if millions in capital loss carryforwards are sitting on the books.

This matters most in mergers, acquisitions, and large equity raises. A corporation with substantial carryforwards may find them effectively worthless after an acquisition because the annual cap is too low to absorb them before the five-year window expires.

S-Corporations Follow Different Rules

Everything above applies to C-corporations, which are separate taxable entities that pay their own income tax. S-corporations work differently. An S-corporation generally does not pay corporate-level income tax; its income, deductions, gains, and losses pass through to shareholders on Schedule K-1.¹⁶ The S-corporation itself isn’t subject to the corporate capital loss limitation.

Shareholders who receive capital losses from an S-corporation apply the individual rules: losses first offset personal capital gains, and then up to $3,000 of any remaining net capital loss can reduce ordinary income each year.¹ Individual capital losses that exceed those limits carry forward indefinitely, which is considerably more forgiving than the five-year corporate carryforward. Shareholders also need enough basis in their S-corporation stock and debt to actually claim the loss.¹⁷

1
Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses
2
Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
3
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
4
Internal Revenue Service. About Form 1139, Corporation Application for Tentative Refund
5
Internal Revenue Service. Instructions for Schedule D (Form 1120)
6
Office of the Law Revision Counsel. 26 U.S. Code 1231 – Property Used in the Trade or Business and Involuntary Conversions
7
Internal Revenue Service. Instructions for Form 4797 Sales of Business Property
8
eCFR. 26 CFR 1.165-5 – Worthless Securities
9
Internal Revenue Service. Losses (Homes, Stocks, Other Property)
10
Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses
11
Office of the Law Revision Counsel. 26 USC 1504 – Definitions
12
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Persons
13
Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities
14
Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change
15
Office of the Law Revision Counsel. 26 USC 383 – Special Limitations on Certain Excess Credits, Etc.
16
Internal Revenue Service. Schedule K-1 (Form 1120-S)
17
Internal Revenue Service. 2025 Shareholders Instructions for Schedule K-1 (Form 1120-S)