If your capital losses exceed your capital gains for the year, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately), and the rest becomes a capital loss carryover that rolls into future tax years until it’s fully used.1Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses The carryover never expires. It follows you from return to return, keeping its original short-term or long-term character, until every dollar has offset a gain or been deducted against ordinary income.2Internal Revenue Service. Topic No. 409 Capital Gains and Losses
How to Calculate the Carryover
Start with your overall net capital loss for the year, the number you land on after netting short-term losses against short-term gains, long-term against long-term, and then combining the two. Subtract $3,000 (or $1,500 if you’re married filing separately). Whatever remains is your carryover.
The catch is figuring out how much of that carryover is short-term and how much is long-term. Under the rules in the Treasury regulations, the $3,000 deduction absorbs your short-term losses first. Only after the short-term losses are used up does the deduction start eating into your long-term losses.3eCFR. 26 CFR 1.1212-1 – Capital Loss Carryovers and Carrybacks The remainder in each bucket carries forward and keeps its original character.
A worked example. You end the year with a $2,000 net short-term capital loss and an $8,000 net long-term capital loss, for a total net loss of $10,000. The $3,000 deduction wipes out the full $2,000 short-term loss and then takes $1,000 out of the long-term loss. Your short-term carryover is zero. Your long-term carryover is $7,000.
If the entire $10,000 loss had instead been short-term, the whole $7,000 carryover would be short-term. The IRS Capital Loss Carryover Worksheet in the Schedule D instructions walks through this computation line by line.4Internal Revenue Service. Schedule D (Form 1040) – Capital Gains and Losses
Why the Short-Term or Long-Term Label Sticks
A short-term loss carried forward is still treated as a short-term loss the year you use it. A long-term loss stays long-term. This matters because short-term losses offset short-term gains first, shielding income that would otherwise be taxed at your full ordinary rate, while long-term losses offset long-term gains that were already taxed at the preferential 0%, 15%, or 20% rates. Losing track of the character can cost you the better tax outcome.
How the Carryover Gets Used in Later Years
When you file the following year, your carryover enters the calculation as if you realized the loss in the new year. A short-term carryover behaves like a new short-term loss; a long-term carryover behaves like a new long-term loss.3eCFR. 26 CFR 1.1212-1 – Capital Loss Carryovers and Carrybacks
The carryover offsets gains in its own category first. Carry forward a $5,000 short-term loss, realize $8,000 in new short-term gains, and the carryover reduces your taxable short-term gain to $3,000. That offset happens before the $3,000 ordinary income deduction comes into play, so in a strong year the carryover can shelter a large chunk of gains without touching the annual cap at all.
If new gains don’t fully absorb the carryover, the leftover can be deducted against ordinary income, subject again to the $3,000 annual limit ($1,500 married filing separately).1Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses Say you carry forward a $4,000 short-term loss and have no new gains. You deduct $3,000, and $1,000 rolls into the next year, still as a short-term loss. The cycle repeats until the original loss is exhausted.
You must report the carryover on your return every year, even if your income is low enough that the deduction provides no tax benefit.5Internal Revenue Service. Instructions for Schedule D (Form 1040) You can’t skip a year and save the carryover for a higher-income year. If your taxable income is zero or negative, the $3,000 allowance still applies and reduces the remaining carryover balance even though it saved you nothing in actual tax.
The Wash Sale Rule Can Kill Your Carryover
The wash sale rule is the single biggest trap for investors trying to harvest losses. Sell an investment at a loss and buy back the same or a substantially identical security within 30 days before or after the sale, and the IRS disallows the loss.6Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities A disallowed loss can’t be deducted in the current year and won’t generate a carryover the way you’d expect.
The loss isn’t gone forever. It’s added to your cost basis in the replacement shares. If you sold 100 shares at a $1,500 loss and repurchased them at $30 per share, your new basis becomes $45 per share. You recover the tax benefit when you eventually sell the replacement shares, assuming you don’t trigger another wash sale.
If you’re selling to lock in a loss for carryover purposes, wait at least 31 days before buying back anything substantially identical. Stocks of one company are generally not considered substantially identical to stocks of a different company, so you can reinvest in a similar-but-different fund or security without tripping the rule.
Losses That Behave Differently
A few loss types come with their own rules that change how, or whether, they feed into a carryover.
Worthless Securities
If a stock or bond becomes completely worthless, the IRS treats it as sold for $0 on the last day of the tax year in which it became worthless.7Internal Revenue Service. Losses (Homes, Stocks, Other Property) 1 That deemed sale date sets the holding period. A stock bought in March 2025 that becomes worthless in June 2026 is treated as sold on December 31, 2026, which makes the loss long-term. The character of your eventual carryover can turn on this detail.
Non-Business Bad Debts
Money you loaned outside a business context, if the debt becomes totally worthless, is deducted as a short-term capital loss regardless of how long ago you made the loan.8Internal Revenue Service. Topic No. 453 Bad Debt Deduction Partially worthless personal debts don’t qualify. You need to show the debt was a genuine loan rather than a gift, that you made reasonable collection efforts, and that repayment is not realistic. Any resulting carryover is short-term.
Personal-Use Property
Losses on personal-use property, including your home, car, and household goods, are not deductible.2Internal Revenue Service. Topic No. 409 Capital Gains and Losses Selling your house at a loss produces no capital loss, no reduction in taxable income, and no carryover.
Death and Divorce
Capital loss carryovers do not survive the taxpayer’s death the way many people assume. Any unused carryover can be claimed on the decedent’s final income tax return, but it cannot be deducted on the estate’s income tax return afterward.9Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators If a surviving spouse files a joint return for the year of death, the full carryover can be used on that joint return, even against income the surviving spouse earned after the date of death.
There is one narrow path to beneficiaries. If the estate itself has unused capital loss carryovers when it terminates, those carryovers pass to the beneficiaries who receive the estate’s property, and they claim them on their own returns with the same character the losses had in the estate.9Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators A carryover that belonged personally to the decedent and was never transferred to an estate simply disappears. For someone in poor health sitting on a large carryover, accelerating gains to absorb the losses before they’re lost is worth discussing with a tax advisor.
Divorce raises a similar allocation question. When a couple that filed jointly has a capital loss carryover and later files separately, each spouse carries forward the portion tied to assets they individually owned. Carryovers from jointly owned assets are split equally.
Forms and Records
Individual sales get reported on Form 8949, with the totals flowing to Schedule D, where the netting happens.4Internal Revenue Service. Schedule D (Form 1040) – Capital Gains and Losses Schedule D has dedicated lines for prior-year carryovers: line 6 for short-term and line 14 for long-term. You fill those lines using the Capital Loss Carryover Worksheet in the Schedule D instructions.5Internal Revenue Service. Instructions for Schedule D (Form 1040) You don’t file the worksheet with the IRS, but working through it each year is the only reliable way to track how much carryover you have left and what character it retains.
Keep your completed worksheets indefinitely. If you’re audited years from now, you’ll need to trace the carryover back to the tax year the loss was originally realized.