The capital loss deduction lets you subtract investment losses from your taxable income, but only after a specific netting process and only up to $3,000 per year ($1,500 if you’re married filing separately).1Office of the Law Revision Counsel. 26 U.S.C. 1211 – Limitation on Capital Losses Anything above that limit doesn’t disappear. It carries forward to future tax years, with no expiration, until you’ve used it up.
How Gains and Losses Get Netted First
Before any loss touches your wages or other ordinary income, the tax code requires you to run your investment activity through a specific order of operations.
Sort every sale from the year by holding period. Anything held one year or less is short-term. Anything held longer than a year is long-term.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses Combine gains and losses within each bucket to get a net short-term figure and a net long-term figure.
Then merge the two. A net short-term loss offsets any net long-term gain, and a net long-term loss offsets any net short-term gain. Only whatever remains after all gains have been absorbed becomes available to reduce ordinary income.
The $3,000 Annual Limit
Once netting is done, if you’re still in the red, you can deduct up to $3,000 of that net loss against wages, interest, and other ordinary income.1Office of the Law Revision Counsel. 26 U.S.C. 1211 – Limitation on Capital Losses Married filing separately cuts that to $1,500.
The cap is absolute. A $200,000 loss and a $5,000 loss both give you the same $3,000 deduction in the year of the sale. What differs is what’s left to carry forward.
Carrying Losses Forward to Future Years
Any net capital loss above the annual limit rolls into the next tax year.3Office of the Law Revision Counsel. 26 U.S.C. 1212 – Capital Loss Carrybacks and Carryovers The carried amount keeps its character as short-term or long-term, and it goes through the same netting process next year. You can repeat this indefinitely. There is no time limit.
The one deadline is death. Unused carryovers cannot pass to your heirs, your surviving spouse, or your estate. Whatever hasn’t been used when a taxpayer dies is permanently lost. If you’re sitting on large unrealized losses later in life, that’s worth thinking about while you can still put them to work.
Which Investments Qualify
Almost anything you hold as an investment counts as a capital asset: stocks, bonds, mutual funds, exchange-traded funds, precious metals, and income-producing real estate.4Internal Revenue Service. Publication 550 – Investment Income and Expenses Sell any of these below your adjusted cost basis and the difference is a deductible capital loss.
Digital assets qualify too. The IRS treats cryptocurrency, stablecoins, and NFTs as property, so a loss on sale or exchange is reported the same way as a stock loss.5Internal Revenue Service. Frequently Asked Questions on Digital Asset Transactions
Personal-use property is where people get tripped up. If you sell your home, your car, furniture, or other personal items at a loss, none of it is deductible.6Internal Revenue Service. What if I Sell My Home for a Loss The deduction only exists for property held for investment or income. Gains on personal property, meanwhile, are still taxable. The asymmetry is real, and it surprises people.
The Wash Sale Rule
The most common way to accidentally kill a capital loss is a wash sale. If you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after that sale, the IRS disallows the loss.7Office of the Law Revision Counsel. 26 U.S.C. 1091 – Loss From Wash Sales of Stock or Securities The window runs in both directions, so the effective blackout is 61 days around the sale.
In most cases the loss is deferred rather than lost. The disallowed amount is added to the cost basis of the replacement security, and your original holding period carries over.7Office of the Law Revision Counsel. 26 U.S.C. 1091 – Loss From Wash Sales of Stock or Securities When you eventually sell the replacement without triggering another wash sale, you get the deduction then.
One scenario destroys the loss for good: selling a stock at a loss in a taxable account and repurchasing it inside an IRA or Roth IRA within the 30-day window. The IRS still treats it as a wash sale, but because an IRA basis cannot absorb the disallowed loss, the deduction is gone.8Internal Revenue Service. Revenue Ruling 2008-5
Sales to Family or Entities You Control
Selling an asset at a loss to a related party will not produce a deductible loss. The rule covers your spouse, siblings, parents, children, grandchildren, and any corporation or partnership where you own more than 50% of the value.9Office of the Law Revision Counsel. 26 U.S.C. 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers Trusts and their grantors or beneficiaries are covered too.
If the related party later sells the property at a gain, that gain is reduced by the previously disallowed loss.9Office of the Law Revision Counsel. 26 U.S.C. 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers The deduction shifts to the buyer and only emerges on a future profitable sale.
Losses on Worthless Securities
You don’t need to sell a security to claim a loss on it. If a stock, bond, or other security becomes completely worthless during the year, you can deduct the loss as if you sold it for zero on the last day of the taxable year.10Office of the Law Revision Counsel. 26 U.S.C. 165 – Losses That year-end deemed sale date can push a recently purchased security into long-term territory.
The standard is total worthlessness. A stock trading at a penny still has value. A steep decline isn’t enough. Bankruptcy that leaves shareholders with nothing in liquidation typically establishes worthlessness, and you should keep documentation of whatever event triggered it, because the IRS may push back on the year you claim the loss.
Section 1244 Small Business Stock
The $3,000 cap is a rough deal if you took a large loss on a startup investment. Section 1244 offers a partial escape: up to $50,000 of a loss on qualifying small business stock ($100,000 for married filing jointly) can be treated as an ordinary loss rather than a capital loss.11Office of the Law Revision Counsel. 26 U.S.C. 1244 – Losses on Small Business Stock An ordinary loss offsets wages dollar for dollar, with no annual cap.
The corporation must meet requirements. It could not have received more than $1,000,000 in total money and property for all its stock at the time your shares were issued, and more than half of its gross receipts over its five most recent tax years must have come from active business rather than passive sources like rents, royalties, and dividends.11Office of the Law Revision Counsel. 26 U.S.C. 1244 – Losses on Small Business Stock You also must have received the stock directly from the corporation for money or property, not on a secondary market. Anything above the $50,000 or $100,000 ordinary-loss limit falls back to regular capital-loss treatment.
Reporting the Loss on Your Return
Each individual sale goes on Form 8949, with the proceeds in Column (d) and your adjusted cost basis in Column (e).12Internal Revenue Service. Instructions for Form 8949 Totals from Form 8949 flow to Schedule D, which handles the short-term and long-term netting.13Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses Schedule D then produces the single figure that goes to your Form 1040, automatically capped at $3,000 or $1,500 if the result is a loss.14Internal Revenue Service. Schedule D (Form 1040) – Capital Gains and Losses
If you’re carrying a loss from a prior year, add it to your current-year short-term or long-term losses on Schedule D before netting. The IRS doesn’t track your carryover balance. You do, using your prior-year Schedule D and the Capital Loss Carryover Worksheet in the instructions.
Watch Your Basis Reporting
Your brokerage will send Form 1099-B for most stock, bond, and fund sales. Check whether each security is marked “covered” or “noncovered.” For covered securities, the broker reported your basis to the IRS. For noncovered securities, they may not have reported basis at all, which puts the burden on you.15Internal Revenue Service. Instructions for Form 1099-B (2026) Getting the basis wrong is one of the fastest ways to draw IRS attention, since the agency sees the sale proceeds without a matching cost figure.
Keep the Paperwork
If you can’t document your basis on audit, the IRS can treat it as zero and turn your entire sale price into a taxable gain. An underpayment caused by a negligent or unsupported deduction also triggers a 20% accuracy-related penalty on the tax you should have paid.16Internal Revenue Service. Accuracy-Related Penalty Hold brokerage statements, trade confirmations, and 1099-B forms for at least three years after filing. For a carryover that stretches across many years, keep the original records until the final year’s return is closed to audit.