Yes, short-term capital losses can offset long-term capital gains, but only after a required netting sequence runs first. Short-term losses are applied against short-term gains inside their own bucket, long-term losses against long-term gains inside theirs, and only the leftover net loss from one bucket crosses over to reduce the net gain in the other.1Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses There is no dollar cap on this cross-category offset: a large enough short-term loss can wipe out a long-term gain entirely.
How the Netting Sequence Works
Every capital transaction sorts into one of two buckets based on holding period. Assets held one year or less are short-term; assets held more than one year are long-term.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses Inside each bucket, you add the gains and subtract the losses, leaving either a net gain or a net loss for that holding period.
Only after that internal step do the two buckets interact. If one shows a net loss and the other a net gain, they combine. An investor with a $2,000 net short-term loss and a $10,000 net long-term gain reports a $8,000 taxable long-term gain. A $50,000 net short-term loss against a $50,000 net long-term gain leaves zero taxable capital gain for the year.
Short-term gains inside the short-term bucket get absorbed first. If you sold two short-term positions, one for a $5,000 gain and one for a $7,000 loss, the internal netting produces a $2,000 net short-term loss, and only that $2,000 is available to cross over to the long-term side.
Why the Order Changes What You Actually Save
The sequence is not just bookkeeping. Short-term gains are taxed at ordinary income rates, which reach 37% for high earners. Long-term gains are taxed at preferential rates of 0%, 15%, or 20% depending on your taxable income and filing status.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Because the rules force short-term losses to absorb short-term gains first, those losses eliminate income that would have been taxed at higher ordinary rates before they touch any long-term gain taxed at a lower rate. A short-term loss used against a short-term gain saves tax at your marginal ordinary rate; the same loss used against a long-term gain saves tax at 0%, 15%, or 20%. You cannot manually re-order the process, but knowing the rate math helps you decide which losing positions to sell in a year when you also have short-term gains sitting in the account.
Long-Term Gains Taxed Above the Standard Rates
Not every long-term gain sits at 0%/15%/20%. Collectibles such as art, coins, and precious metals face a maximum long-term rate of 28%, and depreciation recapture on real estate carries a maximum 25% rate.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses These higher-rate gains still live in the long-term bucket for netting, so short-term losses can reach them. Erasing a collectibles gain taxed at 28% saves more per dollar than erasing a standard long-term gain taxed at 15%.
When Losses Still Exceed Gains
If the full netting process leaves you with more losses than gains, up to $3,000 of the remaining net loss can be deducted against ordinary income like wages, salary, or interest. The limit is $1,500 for married filing separately.3Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses That $3,000 figure is written into the statute and is not adjusted for inflation.
The deduction reduces taxable income at whatever your marginal rate happens to be. In the 24% bracket, a full $3,000 deduction saves $720 in federal tax.
Carrying the Rest Forward
Anything above the $3,000 cap carries forward to the next tax year, and the carryover keeps its original character.4Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers A short-term loss carries forward as a short-term loss and lands in the short-term bucket next year; a long-term loss carries forward as a long-term loss into the long-term bucket. There is no time limit under current federal law.
Say you finish the year with a $25,000 net capital loss. You deduct $3,000 against ordinary income and carry $22,000 into next year, where it enters the netting process alongside any new gains and losses. With no investment activity the following year, you take another $3,000 deduction and carry $19,000 forward again.
One limitation worth planning around: capital loss carryovers expire when the taxpayer dies. They do not pass to heirs or to a surviving spouse’s future returns. A large unused carryover is a reason to consider realizing gains that the carryover can absorb.
The Wash Sale Rule Can Disqualify the Loss Entirely
Before counting on a short-term loss to offset anything, check the wash sale rule. If you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the IRS disallows the loss.5Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The 61-day window (30 days before, the sale date, 30 days after) catches investors who sell on December 15 and buy back on January 4 thinking they locked in the loss for the prior year.
The disallowed loss is not permanently lost. It gets added to the cost basis of the replacement shares, which means you recover it when you eventually sell those shares in a non-wash transaction.6Internal Revenue Service. Case Study 1 – Wash Sales Sell shares at a $2,000 loss, buy replacement shares for $5,000, and your new basis is $7,000. But the loss is unavailable for this year’s netting, which is the point that trips up harvesting plans.
“Substantially identical” is the fuzzy edge. Repurchasing the same company’s stock is clearly a wash sale. Swapping one S&P 500 index fund for a nearly identical S&P 500 index fund from a different provider is riskier territory, and clear guidance is thin. The conservative moves are to wait out the full 30 days or switch into a fund tracking a meaningfully different index.
The 3.8% Net Investment Income Tax
Higher-income investors owe an additional 3.8% surtax on net investment income, including capital gains, when modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately). These thresholds are not indexed for inflation.7Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
Losses that reduce your net gains also reduce the base for the surtax. A $10,000 short-term loss offsetting a $10,000 long-term gain saves you the regular capital gains tax on that $10,000 plus another $380 in NIIT. Above the MAGI thresholds, the true value of offsetting a gain runs higher than the headline rates alone suggest.
Where This Shows Up on Your Return
The netting happens on Schedule D of Form 1040. Short-term transactions total in Part I (net on Line 7), long-term transactions total in Part II (net on Line 15), and the cross-category netting and final figures land in Part III.8Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
Individual sales are reported on Form 8949 first, sorted by whether the broker reported cost basis to the IRS. If every 1099-B shows basis was reported and no adjustments are needed, you can skip Form 8949 and enter totals directly on Schedule D.9Internal Revenue Service. Instructions for Form 8949 (2025) Wash sale adjustments always require Form 8949 because the disallowed loss and the basis adjustment have to be reported line by line.
If you are carrying losses forward, the Capital Loss Carryover Worksheet in the Schedule D instructions produces the figure that enters the current year’s netting. Keeping a copy each year is what keeps a multi-year carryover from getting lost.