Capital Losses Deduction Limit

When a stock is sold for a profit, the amount earned is referred to as capital gains. The opposite is the capital loss, selling a stock at a loss. Both the capital gains and losses have tax implications. The capital gains are taxable, whereas the capital losses are deductible. Learn more about capital losses deduction in this article with the limits imposed.

The capital losses, in other words, stock losses, are deductible, but you can’t just claim all of the losses to reduce taxable income. The net loss on the stocks that you can write off on your next federal income tax return is $3,000 if married filing a joint return, or single. 

The allowed capital loss deduction is reduced by half for those that are married but filing separately. However, this doesn’t mean that you can’t claim the losses ever again over the threshold. The excess capital losses are rolled over to the next tax return.

How does capital gains loss rollover work?

Assume you have a net loss of $10,000; though this is relatively high, it’s better to explain it with a higher loss amount. For the current tax year, you’re able to claim $3,000 if you’re married filing jointly, or single. The excess $7,000 is carried to the following tax years. 

When the next tax season arrives, you’re able to claim an additional $3,000 and another up to the limit for the following year after that. That said, after three years, you’ll have $1,000 to claim, presuming that you don’t have any net loss. 

Offsetting capital losses for future years

Regardless of the capital loss amount, they don’t expire. You can also use the carried losses to offset capital gains. It’s wise to look at your taxable income and the capital gains tax rate that applies to you. You might be better off taking the deduction for your net losses rather than using them to offset capital gains, especially if most of your income comes from stocks. 

Additionally, take note that capital gains and losses only occur when they are realized. In other words, when you sell the stock. For every tax year, the last day to realize capital gains and losses is the last trading day of the calendar year. This is usually going to be December 31, but it might be earlier.