Yes. Long-term capital losses can offset short-term capital gains, but only after a specific netting order the IRS requires every taxpayer to follow. Short-term gains and losses first cancel each other out, long-term gains and losses do the same, and only then does a leftover loss in one category cross over to reduce a leftover gain in the other. That cross-over is where the real savings live, because short-term gains are taxed at ordinary income rates as high as 37%, while long-term rates top out at 20%.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
How the Netting Order Works
You don’t get to pick which losses cancel which gains. The sequence is fixed, and you report it on Form 8949 with totals carried to Schedule D.2Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
First, add every short-term gain and short-term loss together to get a single net short-term number. Second, do the same for every long-term gain and loss to get a net long-term number. Short-term means you held the asset one year or less; long-term means more than one year.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Third, if one category produced a net gain and the other a net loss, they offset each other. A net long-term loss reduces a net short-term gain. A net short-term loss reduces a net long-term gain. Whatever survives keeps the character of the category it came from.
The practical consequence: if your long-term losses are large enough, they can completely eliminate a short-term gain that would otherwise be taxed at ordinary rates.
Why the Cross-Over Saves Real Money
Short-term gains are stacked on top of your wages and taxed at the same federal rates, which run from 10% up to 37% for 2026.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Long-term gains get the preferential 0%, 15%, or 20% rates depending on taxable income.4Internal Revenue Service. Rev. Proc. 2025-32
Spending a long-term loss on a short-term gain is efficient because you’re using a dollar of loss to kill a dollar of tax at the higher rate. The same dollar of loss, used against a long-term gain, would only cancel tax at the lower rate. The netting order forces losses to go after their own category first, but any excess flows to the other side at full value.
A Worked Example
Suppose in 2026 you have:
- A $25,000 short-term gain from active trading
- An $8,000 short-term loss
- A $12,000 long-term gain from a rental property sale
- A $45,000 long-term loss from stock you held for several years
Short-term side first: $25,000 minus $8,000 is a $17,000 net short-term gain. Long-term side next: $12,000 minus $45,000 is a $33,000 net long-term loss. Now cross-net. The long-term loss absorbs the entire short-term gain and leaves a $16,000 net long-term loss.
Instead of owing ordinary-rate tax on $17,000, you owe nothing on the gain side and have a $16,000 loss to work with.
When the Loss Is Bigger Than the Gain
If the netting process leaves you with a net capital loss, you can deduct up to $3,000 of that loss against ordinary income for the year. If you file married filing separately, the limit is $1,500.5Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses The deduction works against wages, interest, business income, anything.
Whatever is left carries forward to the next tax year with its original character intact. A long-term carryover stays long-term; a short-term carryover stays short-term.6Office of the Law Revision Counsel. 26 U.S. Code 1212 – Capital Loss Carrybacks and Carryovers It enters next year’s netting process in its original lane and offsets same-category gains first before any surplus crosses over again.
In the example above, the $16,000 net long-term loss gives you a $3,000 deduction against 2026 ordinary income, and $13,000 carries into 2027 as a long-term loss. With no gains the following year, you deduct another $3,000 and carry $10,000 into 2028.
There is no time limit on the carryforward.7Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) One hard cutoff does exist: carryovers die with the taxpayer. A surviving spouse can use the loss on a final joint return, but any remaining balance cannot be claimed by heirs or the estate. For an older taxpayer sitting on a large accumulated loss, accelerating gains while the offset is still available may be worth considering.
Harvesting a Loss to Create the Offset: What Can Go Wrong
If you’re planning to sell a losing position specifically to generate the long-term loss that offsets a short-term gain, two rules can trip you up.
The Wash Sale Rule
Selling at a loss and buying the same investment back right away kills the deduction. The wash sale rule disallows the loss if you buy the same or a substantially identical security within 30 days before or after the sale.8Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities That creates a 61-day danger window around the sale date.
The disallowed loss isn’t gone forever. It gets added to the cost basis of the replacement shares and effectively postponed until you sell those shares without triggering another wash sale.9Internal Revenue Service. Case Study 1 – Wash Sales Sell for a $250 loss and buy back inside the window for $800, and your new basis is $1,050. For current-year planning purposes, though, the loss is unavailable. The rule reaches beyond identical stock to things like convertible preferred that tracks the common, deep-in-the-money options, and contracts to acquire the same security. If you want to stay invested in the sector, buy something that is not substantially identical, such as a competitor’s stock or a broad-market ETF.
Worthless Securities
If a stock or bond becomes completely worthless during the year, the IRS treats it as sold for zero on the last day of that tax year.10Office of the Law Revision Counsel. 26 USC 165 – Losses The December 31 deemed sale date can push a borderline position past the one-year mark and convert what would have been a short-term loss into a long-term one, which matters when you were counting on that loss to offset a short-term gain in its own category first.
Don’t Forget the 3.8% Surtax
High earners pay an additional 3.8% net investment income tax on investment income, including capital gains, once modified adjusted gross income crosses $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately.11Internal Revenue Service. Topic No. 559, Net Investment Income Tax Because capital losses reduce net investment income, the same netting that cancels your short-term gain can also shrink or eliminate the surtax on whatever other investment income you have. That’s an easily missed layer of benefit on top of the rate savings.
Most states tax capital gains too, usually at ordinary income rates. In a high-tax state, the combined federal and state rate on a short-term gain can exceed 45%, which makes the long-term loss used against it that much more valuable.