Yes, long-term capital losses can offset short-term capital gains, but only after a required netting sequence runs its course. Short-term transactions net against each other first, long-term transactions do the same, and only then does a net loss on one side cross over to reduce a net gain on the other. That crossover is where the tax savings sit, because short-term gains are taxed at ordinary income rates as high as 37%, while long-term gains top out at 20%.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
The Netting Order the IRS Requires
You don’t get to choose which loss cancels which gain. The tax code sets the order, and you report it on Form 8949 with totals flowing onto Schedule D.2Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
First, add every short-term gain and every short-term loss from the year and combine them into one number. Short-term means you held the asset for one year or less.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses The result is either a net short-term gain or a net short-term loss.
Second, do the same with your long-term transactions (assets held more than one year). Again, you end with either a net gain or a net loss on that side.
Third, cross-net. If one side is a net gain and the other is a net loss, they offset. A net long-term loss reduces a net short-term gain, and a net short-term loss reduces a net long-term gain. Whatever survives keeps the character of the larger side.
A Quick Illustration
Say short-term nets out to a $10,000 gain, and long-term nets out to a $5,000 loss. Cross-netting leaves a $5,000 net short-term gain, taxed at ordinary income rates.
Flip the sizes. A $40,000 net long-term loss against a $25,000 net short-term gain wipes out the gain entirely and leaves a $15,000 net capital loss that keeps its long-term character going into the next step.
A Fuller Worked Example
Suppose your 2026 transactions look like this: a $25,000 short-term gain from active trading, an $8,000 short-term loss, a $12,000 long-term gain on a rental property, and a $45,000 long-term loss on stock you held for years.
Step one nets the short-term side: $25,000 minus $8,000 leaves a $17,000 net short-term gain. Step two nets the long-term side: $12,000 minus $45,000 leaves a $33,000 net long-term loss. Step three cross-nets: the $33,000 long-term loss absorbs the entire $17,000 short-term gain and still leaves a $16,000 net long-term loss.
Without the crossover, that $17,000 short-term gain would have been taxed at your ordinary rate. Instead, it’s gone, and you still have loss left to deduct.
How the Surviving Amount Is Taxed
If a gain survives the netting, its character decides the rate. A net short-term gain is taxed as ordinary income, at the same rates as your wages. For 2026, those rates run from 10% to 37%.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
A net long-term gain gets preferential rates of 0%, 15%, or 20%, depending on taxable income. For 2026:4Internal Revenue Service. Rev. Proc. 2025-32
- 0% rate: taxable income up to $49,450 single or married filing separately, $98,900 married filing jointly, $66,200 head of household.
- 15% rate: income above the 0% ceiling up to $545,500 single, $613,700 joint, $306,850 married filing separately, $579,600 head of household.
- 20% rate: income above the 15% ceiling.
The rate spread is the whole reason cross-netting matters. Using long-term losses to erase short-term gains converts a bill calculated at up to 37% into no bill at all, and preserves any remaining loss for future use.
When the Loss Is Bigger Than the Gain
If the netting leaves you with an overall capital loss, you can deduct up to $3,000 of that loss against ordinary income for the year. The limit drops to $1,500 if you file married filing separately.5Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses The deduction works against wages, interest, business income, or any other ordinary income.
Anything above $3,000 carries forward into the next year. The carryover keeps its original character: a long-term loss carries forward as long-term, a short-term loss as short-term.6Office of the Law Revision Counsel. 26 U.S. Code 1212 – Capital Loss Carrybacks and Carryovers Next year, the carried loss enters the same netting process in its category, offsetting same-type gains first before any leftover cross-nets again.
There is no time limit on the carryforward.7Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) Returning to the example above: after deducting $3,000 of the $16,000 net long-term loss against 2026 ordinary income, you carry $13,000 forward as a long-term loss into 2027. Without gains that year, another $3,000 comes off ordinary income and $10,000 rolls into 2028.
Watch the Wash Sale Rule
Selling a loser to capture the loss and then buying it right back does not work. The wash sale rule disallows the deduction if you buy the same or a substantially identical security within 30 days before or 30 days after the sale.8Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities The full window is 61 days.
The disallowed loss isn’t lost forever. It attaches to the cost basis of the replacement shares, deferring the benefit until you sell those shares in a transaction that doesn’t trigger another wash sale.9Internal Revenue Service. Case Study 1 – Wash Sales If you sold stock at a $250 loss and repurchased inside the window for $800, your new basis becomes $1,050.
The rule reaches beyond identical stock. Convertible preferred that tracks the common, deep-in-the-money options, and contracts to acquire the same security can all trigger it. To stay exposed to the same sector without a wash sale, buy something not substantially identical, such as a competitor’s stock or a broad ETF.
Worthless Securities and the Holding Period
If a security becomes completely worthless, the IRS treats it as sold for zero on the last day of the tax year.10Office of the Law Revision Counsel. 26 USC 165 – Losses That deemed December 31 sale date can push a borderline position past the one-year mark, converting what would have been a short-term loss into a long-term one. If you’re planning to use that loss against short-term gains, the classification still runs through the same netting order described above.
A Second Benefit: The 3.8% Surtax
High earners pay an additional 3.8% net investment income tax on the smaller of their net investment income or the amount by which modified adjusted gross income exceeds the threshold for their filing status.11Internal Revenue Service. Topic No. 559, Net Investment Income Tax The thresholds:
- Single or head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
Capital losses reduce net investment income, so a long-term loss that erases a short-term gain also shrinks or eliminates the 3.8% surtax on that gain. The savings from cross-netting compound: ordinary-rate tax avoided, plus surtax avoided, plus a possible $3,000 deduction against wages, plus a carryover to use next year.