Short-Term Loss Tax Deduction: $3,000 Limit and Wash-Sale Rule

A short-term capital loss tax deduction works in a set order: the loss first cancels out capital gains you realized the same year, then reduces up to $3,000 of ordinary income like wages, and anything still left over carries forward to future years with no expiration. A loss counts as short-term when you sell a capital asset you held for one year or less at less than you paid for it.

What Counts as a Short-Term Loss

The holding period is the dividing line. Sell a capital asset after holding it one year or less, and any loss is short-term.¹ The clock starts the day after you acquire the asset, not the purchase date. Buy shares on March 10 and sell on March 10 the next year, and you have held them exactly one year, still short-term. Sell on March 11 instead, and the loss is long-term.

Most things individual investors own qualify as capital assets: stocks, bonds, mutual funds, ETFs. The IRS treats cryptocurrency as property, so selling Bitcoin or Ethereum at a loss within one year of buying produces a short-term capital loss too.²

To calculate the loss, subtract sale proceeds from your cost basis. Cost basis includes the purchase price plus commissions and transaction fees on both the buy and the sale. Buy 100 shares at $50 with a $10 commission, sell six months later at $40 with another $10 commission, and your basis is $5,010 against proceeds of $3,990. The short-term loss is $1,020.

How the Loss Offsets Your Gains First

Capital losses do not go straight to your income tax calculation. Schedule D runs a netting process that matches losses against gains before anything reaches your wages.³

Short-term losses offset short-term gains first. This is where the biggest tax benefit sits, because short-term gains are taxed at ordinary income rates as high as 37%. Erasing a short-term gain with a short-term loss removes income that would otherwise be taxed at your top marginal rate.

If short-term losses exceed short-term gains, the extra offsets any long-term capital gains. Long-term gains are taxed at 0%, 15%, or 20% depending on taxable income.¹ Offsetting them still saves tax, just at lower rates than offsetting short-term gains.

An example. Suppose you have $10,000 in short-term losses and $6,000 in short-term gains in 2026, plus $3,000 in long-term gains from a stock you have held for years. Netting the short-term side leaves a $4,000 short-term loss. That absorbs all $3,000 of long-term gain, and you are left with $1,000 in net capital loss to apply against ordinary income.

The $3,000 Cap Against Ordinary Income

Once your gains have been netted to zero, any remaining net capital loss deducts against ordinary income, capped at $3,000 a year. Married filing separately drops the cap to $1,500.¹ The limit is a combined cap on short-term and long-term losses, not separate buckets.

Congress set the $3,000 figure in 1978 and has never indexed it for inflation. In today’s dollars the original limit would be worth roughly $15,000. Large losses can take years to work off. A $30,000 net capital loss with no future gains to absorb it would take a full decade to deduct at $3,000 a year.

The deduction reduces your adjusted gross income directly. Because AGI drives eligibility for various credits and deductions, that reduction can pay off in secondary ways beyond the immediate tax cut.

Carrying the Excess Loss Forward

Anything above the $3,000 cap carries to the next tax year automatically, and there is no expiration. The carryover continues indefinitely until you use it up against future gains or drain it $3,000 at a time against ordinary income.¹

The loss keeps its character when it carries. An excess net short-term loss stays short-term next year; an excess net long-term loss stays long-term.⁴ That matters because next year’s netting starts with the same order, so a carried short-term loss will first hit new short-term gains, preserving the higher tax benefit.

The Schedule D instructions include a Capital Loss Carryover Worksheet for the computation, which needs the prior year’s Schedule D. Tax software usually handles this automatically, but a carryover will not transfer if you switch providers unless you enter it manually.

One boundary worth knowing: unused carryovers die with the taxpayer. A capital loss sustained in a decedent’s final year, or carried from earlier years, can only be deducted on the final income tax return. The estate cannot claim what is left.⁵

The Wash-Sale Rule That Kills the Deduction

This is where short-term loss deductions most often go wrong. The wash-sale rule disallows the loss if you buy a substantially identical security within 30 days before or after the sale, a 61-day window in total.⁶

In most cases the loss is not lost forever. The disallowed amount is added to the cost basis of the replacement shares, deferring the tax benefit until you eventually sell those.⁷ The holding period of the original shares also tacks onto the new ones. So eight months on the original, sold at a loss, repurchased the next day, and the replacement inherits the eight-month holding period.

“Substantially identical” is a facts-and-circumstances test. Shares of the same company always qualify. Two companies in the same industry usually do not, even when they trend together. Different index funds tracking different benchmarks are typically fine, but two S&P 500 index funds from different providers could be treated as substantially identical.

Never Repurchase in an IRA

One version of this is far worse than a deferral. Sell stock at a loss in a taxable account, then repurchase the same stock in an IRA or Roth IRA inside the 30-day window, and the wash-sale rule still applies.⁷ But because IRAs do not track cost basis for tax purposes, the disallowed loss cannot be added to the basis of the IRA shares. The loss is permanently gone. It does not defer, it does not carry forward, and it never reduces your taxes.

Picking Which Shares to Sell

If you have bought the same stock at different times and prices, you can choose which lot to sell. The IRS allows specific identification, meaning you can direct your broker to sell the highest-cost shares first to maximize the loss.⁸ Without a specific identification, the IRS defaults to first-in, first-out, which treats the oldest shares as sold first.

Specific identification matters most when you are selling only part of a position that contains both winning and losing lots. You can pick the losing lots and leave the winners alone. To use it, you have to tell your broker which lot you are selling at or before the trade. Most online brokerages let you pick lots during the order, and you can set your account default to specific identification rather than FIFO or average cost.

Year-End Timing

To claim a short-term loss on your 2026 return, execute the sale by December 31, 2026. The trade date controls, not the settlement date. Stock trades now settle the next business day, so a trade on December 31 settles in January but still counts for 2026.

Watch the wash-sale window around year-end. Sell on December 15 and buy back on January 5, and the repurchase falls inside 30 days and triggers a wash sale. Waiting a full 31 days after a December sale pushes the repurchase into mid-January, usually safe. If you want to stay in the market during the wait, you can reinvest immediately in a similar but not substantially identical fund.

Reporting the Loss on Your Return

Two forms feed into each other. Form 8949 is where you list each sale: description, dates acquired and sold, proceeds, and cost basis.⁹ Short-term and long-term transactions go in separate parts. The subtotals then flow to Schedule D, where the netting happens and your final net gain or allowable loss is calculated.¹⁰

Your broker sends Form 1099-B each year with proceeds and usually cost basis for every taxable-account sale. Compare it to your own records. Brokers sometimes report incorrect basis, especially for shares transferred from another brokerage or acquired through splits, mergers, or reinvested dividends. If the 1099-B is wrong, report the correct figures on Form 8949 and use column (g) for the adjustment.

Wash sales add another layer. Your broker may flag them in Box 1g of the 1099-B, but brokers only track wash sales within a single account. Trigger one across two brokerages and neither will catch it. You are responsible for identifying the wash sale and reporting the disallowed loss with the proper adjustment code on Form 8949.¹¹

The final net capital gain or allowable loss from Schedule D transfers to Form 1040, where it affects your AGI and the tax you owe.

1
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
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Internal Revenue Service. Digital Assets
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Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) – Capital Gains and Losses
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Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
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Internal Revenue Service. Decedent Tax Guide
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Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
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Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
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Internal Revenue Service. Stocks (Options, Splits, Traders) 1
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Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
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Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses
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Internal Revenue Service. Income – Capital Gain or Loss Workout – Case Study 1: Wash Sales