Can Corporations Deduct Capital Losses Against Gains?

Yes, a C-corporation can deduct capital losses against capital gains, but only against capital gains, and only in the same tax year unless the loss is carried to another year. Corporations deducting capital losses against gains get no equivalent to the individual taxpayer’s $3,000 ordinary-income cushion: if there are no capital gains to absorb a loss, the loss provides no current tax benefit and must be carried back three years, then forward five, before it expires.¹

The Core Rule

A corporation’s capital losses are deductible only up to the amount of its capital gains for the year.¹ A corporation that sells stock at a $500,000 loss but has only $300,000 in capital gains uses $300,000 of the loss that year. The remaining $200,000 cannot touch operating income from sales or services. It waits.

Individuals, by contrast, can deduct up to $3,000 of net capital losses against ordinary income each year.² Corporations get nothing comparable.

Timing therefore matters. A corporation anticipating a large capital loss has reason to accelerate the recognition of capital gains into the same year by selling appreciated investments before year-end. The reverse applies when sizable gains are expected: harvesting losses on underperforming investments in the same period keeps those losses from being stranded.

What Happens to Unused Losses

When a corporation ends the year with a net capital loss, the unused amount is carried back three years and then forward five.³ The carryback goes to the earliest of the three years first. A 2026 net capital loss moves first to 2023, then 2024, then 2025, offsetting capital gains in each. The corporation claims the resulting refund on Form 1139 (for a quick tentative refund) or Form 1120-X (an amended return).⁴

One limit on the carryback: it cannot create or increase a net operating loss in the year it is applied to.³

Anything still unused after the three carryback years moves forward, year by year, for up to five years. If the corporation cannot generate enough capital gains across the entire eight-year window, the leftover loss expires permanently.

A detail that trips people up: corporate net capital losses carried to another year are always treated as short-term, regardless of how long the underlying asset was held.³ Because corporations tax short-term and long-term gains at the same rate, this reclassification does not change the dollar value of the offset, but it affects how the loss is reported on Schedule D (Form 1120), which tracks current-year gains and losses alongside any unused carryover amounts.⁵

Transactions That Disallow the Loss Entirely

Two rules can wipe out the deduction before the limitation and carryover rules ever come into play.

Related Party Sales

A corporation cannot deduct a loss on the sale of property to a related party. If the buyer is an individual who owns more than 50% of the corporation’s outstanding stock, the loss is completely disallowed, even if the sale price reflects fair market value.⁶ The rule reaches sales between a corporation and its controlling shareholder, between two corporations under common ownership, and between a corporation and a partnership sharing the same owners. Ownership is measured both directly and indirectly, so routing a sale through family members or controlled entities does not avoid the rule.

The disallowed loss is not always lost forever. If the related buyer later sells the property to an unrelated third party at a gain, the previously disallowed loss reduces the buyer’s recognized gain on that resale. If the related buyer sells at a loss, however, the original disallowed loss is never recovered.

Wash Sales

The wash sale rule applies to corporations. If a corporation sells a security at a loss and buys substantially identical stock or securities within 30 days before or after the sale, the loss is disallowed.⁷ The only exception is for dealers in securities incurring the loss in the ordinary course of business.

The disallowed amount gets added to the cost basis of the replacement security, so the tax benefit is deferred rather than destroyed. But for a corporation trying to harvest a loss to offset gains in a specific year, a repurchase inside the 61-day window undoes the strategy.

Losses That Escape the Capital Loss Limitation

Not every loss on an asset sale is a capital loss. Two categories get much better treatment, and misclassifying them is costly.

Section 1231 Business Property

Property used in a trade or business and held for more than a year is Section 1231 property, not a capital asset. When a corporation’s Section 1231 losses exceed its Section 1231 gains for the year, the net loss is treated as an ordinary loss and directly reduces operating income. The statute explicitly says the Section 1211 capital loss limitation does not apply when calculating whether Section 1231 losses exceed gains.⁸

Qualifying property includes depreciable equipment, business real estate, livestock held for draft or breeding purposes, and certain timber and mineral rights. These sales are reported on Form 4797 rather than Schedule D.⁹ When Section 1231 gains exceed losses, the net gain is taxed as long-term capital gain. The rule gives corporations ordinary loss treatment when business property sales go badly and capital gain treatment when they go well.

A corporation that mistakenly reports a Section 1231 loss on Schedule D locks the deduction into the restrictive capital loss regime and loses an immediate offset against operating income.

Worthless Securities

When stock or bonds a corporation holds in another company become completely worthless, the loss is generally treated as a capital loss, calculated as if the security were sold for zero on the last day of the tax year.¹⁰¹¹

There is one significant exception. If the parent corporation owns stock meeting the requirements of Section 1504(a)(2), meaning at least 80% of voting power and 80% of total stock value, and the subsidiary earned more than 90% of its gross receipts from active business sources rather than passive income like dividends, rents, or royalties, the loss on the worthless subsidiary stock is treated as an ordinary loss.¹²¹³ Ordinary loss treatment means a dollar-for-dollar offset against operating income with no need to find matching capital gains.

Proving worthlessness is where these claims typically fail. The IRS requires the corporation to permanently surrender all rights in the security and receive nothing in return.¹¹ A security still trading for pennies is not worthless. A company in bankruptcy may not be worthless yet if creditors could still recover something. The corporation must document the identifiable event that made the investment irrecoverable, such as a bankruptcy discharge, dissolution, or regulatory shutdown.

S-Corporations and Consolidated Groups

Everything above applies to C-corporations, which are separate taxable entities. S-corporations do not pay corporate-level income tax in most situations. Their income, deductions, gains, and losses pass through to shareholders via Schedule K-1, and the S-corporation itself is not subject to the corporate capital loss limitations.¹⁴ Shareholders apply the individual rules: capital losses first offset personal capital gains, and up to $3,000 of any remaining net capital loss reduces ordinary income each year, with the excess carrying forward indefinitely.¹ Shareholders still need sufficient basis in their stock and debt to claim the loss.¹⁵

Consolidated return groups get a planning advantage. When a parent and its 80%-or-more-owned subsidiaries file consolidated, capital gains and losses are aggregated across every member into a single calculation.¹⁶ A subsidiary’s large capital loss can be absorbed by capital gains realized elsewhere in the group during the same year. Consolidated net capital losses still exceeding combined group gains follow the same three-year carryback and five-year carryforward rules.

Ownership Changes Can Cap Loss Carryforwards

Capital loss carryforwards face an additional risk if the corporation undergoes a significant ownership change. When shareholders owning 5% or more of the stock increase their combined ownership by more than 50 percentage points within a three-year period, the ability to use pre-change losses is severely restricted.¹⁷

Section 382 is best known for its effect on net operating losses, but Section 383 extends the same framework to capital loss carryforwards. After an ownership change, the pre-change capital losses usable in any post-change year are capped at the corporation’s stock value immediately before the change multiplied by the long-term tax-exempt rate.¹⁸ A corporation with $10 million in stock value and a long-term tax-exempt rate of around 4% would face an annual cap of roughly $400,000, no matter how large the carryforward.

This matters most in acquisitions, mergers, and large equity raises. A corporation sitting on substantial capital loss carryforwards that gets acquired may find those carryforwards effectively worthless because the annual cap is too low to use them before the five-year window closes.

Capital Losses Compared to Net Operating Losses

Capital losses and net operating losses follow fundamentally different rules, and the differences shape planning decisions.

What they offset: capital losses can only offset capital gains; NOLs reduce ordinary taxable income, though post-2017 NOLs are capped at 80% of taxable income in any given year.¹⁹
Carryback: capital losses carry back three years; NOLs arising after 2020 generally cannot be carried back at all.
Carryforward: capital losses carry forward only five years and then expire; post-2017 NOLs carry forward indefinitely.
Deduction cap: capital losses can offset 100% of capital gains in the carryforward year; post-2017 NOLs can offset only 80% of taxable income.

The practical upshot: a net operating loss is almost always more valuable than a capital loss of the same dollar amount. It offsets higher-taxed ordinary income, carries forward without expiration, and faces a percentage cap rather than a type-of-income restriction. This is why the Section 1231 ordinary loss treatment for business property and the affiliated subsidiary exception for worthless securities matter so much: both convert what would otherwise be capital losses into ordinary losses that behave much more like NOLs.

1
Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses
2
Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
3
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
4
Internal Revenue Service. About Form 1139, Corporation Application for Tentative Refund
5
Internal Revenue Service. Instructions for Schedule D (Form 1120)
6
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Persons
7
Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities
8
Office of the Law Revision Counsel. 26 U.S. Code 1231 – Property Used in the Trade or Business and Involuntary Conversions
9
Internal Revenue Service. Instructions for Form 4797 Sales of Business Property
10
eCFR. 26 CFR 1.165-5 – Worthless Securities
11
Internal Revenue Service. Losses (Homes, Stocks, Other Property)
12
Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses
13
Office of the Law Revision Counsel. 26 USC 1504 – Definitions
14
Internal Revenue Service. Schedule K-1 (Form 1120-S)
15
Internal Revenue Service. 2025 Shareholders Instructions for Schedule K-1 (Form 1120-S)
16
eCFR. 26 CFR 1.1502-22 – Consolidated Capital Gain and Loss
17
Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change
18
Office of the Law Revision Counsel. 26 USC 383 – Special Limitations on Certain Excess Credits, Etc.
19
Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction