The Capital Loss Carryover Worksheet in the Schedule D instructions turns last year’s unused capital loss into two numbers you’ll enter on this year’s Schedule D: a short-term carryover on line 6 and a long-term carryover on line 14. You need to run it whenever your prior-year net capital loss was bigger than the $3,000 annual deduction ($1,500 if married filing separately), or your taxable income was too low for the full deduction to bite. The arithmetic is line-by-line, but two things trip people up: how the $3,000 gets split between short-term and long-term losses, and an adjustment that quietly preserves more of your carryover when your income was low.
Do You Actually Have a Carryover
Check your prior-year return before doing any math. You have a carryover only if both of these are true on that return: Schedule D line 21 shows a loss, and either that loss is a smaller negative number than the loss on line 16, or Form 1040 line 15 (taxable income) would have been below zero if the form allowed negative numbers.1Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
Line 16 is your total net capital loss before any limit. Line 21 is what the IRS actually let you deduct against ordinary income, capped at $3,000. When line 16 is a bigger loss than line 21, the difference is the raw material of your carryover. If neither condition holds, your losses were fully absorbed last year and nothing carries forward.
How the Worksheet Splits the Numbers
The worksheet lives in the Schedule D instructions and in Publication 550, marked “Keep for Your Records.” You don’t file it. It produces two outputs, and it gets there on two parallel tracks: one for short-term losses, one for long-term.1Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
Each track starts with the prior-year net loss of that type, subtracts the portion absorbed by gains and by the annual deduction, and ends with a line reading “if zero or less, enter zero; if more than zero, enter this amount on Schedule D” at the appropriate line. Character is preserved: short-term losses stay short-term, long-term stay long-term, and both carry forward indefinitely until used.2Office of the Law Revision Counsel. 26 U.S. Code 1212 – Capital Loss Carrybacks and Carryovers
Short-Term Losses Are Consumed First
When the worksheet allocates your $3,000 deduction between the two buckets, short-term losses are used up first.3Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses If your short-term losses alone are $3,000 or more, the entire annual deduction comes out of the short-term pile and your long-term losses carry forward untouched. Only after short-term losses are exhausted does the deduction start eating long-term losses.
That ordering matters in future years. Short-term losses offset short-term gains first (taxed at ordinary rates), and long-term losses offset long-term gains first (taxed at capital gains rates).4Internal Revenue Service. Topic No. 409, Capital Gains and Losses The character of what you carry forward affects which future gains it neutralizes.
A Straightforward Example
Say your 2025 return had $2,000 in short-term losses, $11,000 in long-term losses, and no capital gains. Net capital loss: $13,000. You deducted $3,000 against ordinary income. Short-term went first: the $2,000 short-term loss was used entirely, then $1,000 came out of the long-term bucket. Your 2026 carryover is $0 short-term and $10,000 long-term. That $10,000 lands on line 14 of your 2026 Schedule D as a negative number.
The Low-Income Adjustment
Here is where the worksheet does work you can’t do in your head. Most people assume the carryover is just the net loss minus $3,000. That’s often right, but not always. Publication 550 defines the carryover as your total net loss minus the lesser of two amounts: the allowable $3,000 deduction, or your taxable income increased by that deduction.3Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
When your taxable income is comfortably positive, $3,000 is the smaller of the two and the shortcut works. When your taxable income is very low or negative because deductions exceeded your other income, the second amount drops below $3,000 and you carry forward more than the shortcut suggests.
Example: $10,000 net capital loss, taxable income before the capital loss deduction of negative $1,000. The second amount is -$1,000 + $3,000 = $2,000. Since $2,000 is less than $3,000, your carryover is $10,000 – $2,000 = $8,000, not the $7,000 naive subtraction would give you. The extra $1,000 survives because the deduction couldn’t reduce a tax bill that was already at zero.2Office of the Law Revision Counsel. 26 U.S. Code 1212 – Capital Loss Carrybacks and Carryovers The worksheet’s line arithmetic handles this automatically. Skip the worksheet and you’ll shortchange your future self.
Where the Carryover Goes on This Year’s Return
Take the two output numbers from the worksheet straight to your current Schedule D. Short-term carryover goes on line 6, long-term carryover on line 14, both entered as negative numbers in parentheses.1Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
From there they join your current-year transactions in the netting process. They offset any capital gains you realized this year. If losses still exceed gains, up to another $3,000 comes off ordinary income, and whatever’s left runs through the worksheet again next year. Current-year sales themselves are reported on Form 8949, which reconciles broker 1099-B figures with what you report; Form 8949 subtotals feed into Schedule D.5Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
Losses That Never Get Into the Carryover
Before you run the worksheet, make sure the underlying losses were actually deductible in the first place. Several categories aren’t, and if any snuck into last year’s Schedule D by mistake, your carryover starts from a bad number.
Losses on personal-use property such as your home, car, or furniture are not deductible and do not carry forward.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses Only investment or business property generates a deductible capital loss.
Losses on sales to related parties — siblings, spouse, parents, grandparents, children, grandchildren, or an entity you control by more than 50% — are permanently disallowed, not deferred to a carryover.6Office of the Law Revision Counsel. 26 U.S. Code 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers The buyer may reduce their eventual gain by your disallowed loss, but nothing carries forward on your return.7Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets
Wash sale losses — where you buy a substantially identical security within 30 days before or after selling at a loss — are disallowed under IRC 1091 and instead added to the basis of the replacement security.8Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities The loss usually returns when you sell the replacement without triggering another wash sale. One trap: wash sale rules apply across accounts, including IRAs and Roth IRAs. If you sell in a taxable account at a loss and rebuy inside your IRA within the 30-day window, the disallowed loss cannot be added to IRA basis, so it’s effectively lost for good.9Internal Revenue Service. Revenue Ruling 2008-5
Worthless securities do qualify for the carryover. They’re treated as sold for $0 on the last day of the tax year, and reported on Form 8949 like any other sale.10Internal Revenue Service. Losses (Homes, Stocks, Other Property) Deemed sale date determines whether the loss is short-term or long-term.
How Long the Carryover Lasts
There is no expiration. A large carryover can survive decades of $3,000-a-year absorption if no offsetting gains show up.2Office of the Law Revision Counsel. 26 U.S. Code 1212 – Capital Loss Carrybacks and Carryovers
The one hard stop is death. A capital loss carryover can only be used on the taxpayer’s final income tax return. Whatever remains is permanently lost; the estate cannot claim it and heirs cannot inherit it.11Internal Revenue Service. IRS Resource Guide – Decedents and Related Issues For jointly held assets, each spouse is treated as owning half, so a surviving spouse can carry forward their half. If the losing asset belonged solely to one spouse and that spouse dies first, any unused portion is lost when the final joint return is filed.
Records to Keep While the Carryover Is Alive
Because a carryover can run for years, the paperwork behind it has to run just as long. Keep records supporting the loss until three years after you file the return that uses the final dollar of the carryover.12Internal Revenue Service. How Long Should I Keep Records For worthless securities, extend that to seven years. In practice that means holding the original purchase and sale confirmations, each year’s Form 1099-B, every intervening Schedule D, and every completed Capital Loss Carryover Worksheet. Losing the paperwork doesn’t erase the carryover, but reconstructing the numbers years later without it is expensive and error-prone.
State Rules May Differ
Most states with an income tax follow the federal capital loss rules, but conformity isn’t universal. Some states impose their own limits or restrict carryovers, so your state carryover number may not match your federal one. Check your state’s rules before assuming the federal worksheet output does double duty.