After you use capital losses to cancel out your capital gains for the year, you can deduct up to $3,000 of any remaining loss against ordinary income such as wages, salary, and interest. The limit drops to $1,500 if you are married filing separately. That is the ceiling on how much capital loss you can deduct in a single tax year against non-investment income, and anything above it carries forward to future years with no expiration.
Net Your Gains and Losses First
The $3,000 figure only applies to what’s left after netting. The tax code sorts every sale into two buckets by holding period: short-term for assets held one year or less, long-term for assets held more than a year. You net short-term against short-term, then long-term against long-term. If one bucket shows a net loss and the other shows a net gain, they combine.1Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses
Only the surplus loss left after all of that reaches the $3,000 rule. The order matters for your actual tax savings too, because short-term gains are taxed at ordinary rates while long-term gains are taxed at 0%, 15%, or 20%. A long-term loss that wipes out a short-term gain is erasing income that would have been taxed at your higher rate.
You report the netting on Schedule D, with individual sales listed on Form 8949 first.2Internal Revenue Service. 2025 Schedule D (Form 1040) Capital Gains and Losses
The $3,000 Annual Limit Against Ordinary Income
When your losses beat your gains after netting, up to $3,000 of the excess can offset other income on your return. That cap applies to single filers, heads of household, and married couples filing jointly. Married individuals filing separately are capped at $1,500 each.3Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
The deduction reduces adjusted gross income, so it offsets income taxed at your marginal rate. A full $3,000 deduction in the 24% bracket saves $720 in federal tax. The $3,000 number has been fixed since 1978 with no inflation adjustment.
One point that trips people up: capital losses do not directly offset qualified dividends, even though qualified dividends are taxed at the same rates as long-term capital gains. The $3,000 flows against ordinary income; there is no line where a capital loss reduces dividends dollar for dollar.
What Happens to Losses Above $3,000
Anything above the annual limit carries forward to the next tax year. The carryover keeps its original character: a short-term loss stays short-term, a long-term loss stays long-term.4Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers For individual taxpayers there is no expiration date, so a large loss from one year can keep working against future gains and ordinary income for as long as it takes to burn through.
Each year the carryover runs through the same process. It first offsets any capital gains you realize, then up to $3,000 (or $1,500 if married filing separately) offsets ordinary income, then the rest rolls forward. The Capital Loss Carryover Worksheet in the Schedule D instructions tracks your short-term and long-term balances separately.5Internal Revenue Service. Instructions for Schedule D (Form 1040)
If you filed jointly with a spouse in a prior year and later switch to separate returns, the carryover belongs to whichever spouse actually incurred the loss. It doesn’t split automatically.5Internal Revenue Service. Instructions for Schedule D (Form 1040)
Carryovers End at Death
Unused carryovers do not survive the taxpayer. Whatever is left can only be claimed on the decedent’s final income tax return, still subject to the $3,000 annual cap. The estate does not inherit the balance, and a surviving spouse cannot claim it on later individual returns.6Internal Revenue Service. Decedent Tax Guide Someone sitting on a $200,000 carryover with no capital gains in their final year gets at most $3,000 of benefit; the rest disappears.
The rule works differently when an estate or trust itself terminates and distributes its assets. A carryover the estate or trust held does pass to the beneficiaries who receive the property.7eCFR. 26 CFR 1.642(h)-1 – Unused Loss Carryovers on Termination of an Estate or Trust That does not rescue losses the individual held personally before death.
Losses You Might Expect to Deduct but Can’t
Some losses are disallowed no matter how the numbers look on paper. These reduce how much you can actually deduct in a year.
Wash Sales
You cannot claim a loss on stock or securities if you buy substantially identical stock or securities within 30 days before or after the sale that created the loss. The window runs both directions, producing a 61-day blackout around the sale date. The disallowed loss isn’t gone; it gets added to the cost basis of the replacement shares, so you recover it when you eventually sell those in a clean transaction.8Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The rule reaches across your accounts too, including selling in a taxable brokerage and buying in an IRA.
The rule applies to “stock or securities,” and the IRS treats cryptocurrency as property rather than a security.8Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities As of 2026, selling crypto at a loss and immediately buying it back does not trigger a wash sale. Legislative proposals have been floated to close this gap; none have been enacted.
Sales to Related Parties
Losses on sales between certain related persons are disallowed even when the loss is economically real. That includes sales between siblings, spouses, ancestors, and direct descendants; between an individual and a corporation they control by more than 50%; between a grantor and a trust they created; and various other related entity combinations.9Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers If the related buyer later sells the property at a gain, the previously disallowed loss can reduce that gain, but only up to the amount of the gain.
Personal-Use Property
Losses on personal-use property are not deductible at all. That covers your home, your car, your furniture, and other assets you held for personal enjoyment rather than investment, regardless of how much money you lost on them.10Internal Revenue Service. Topic No. 409, Capital Gains and Losses Only property held for investment or business use enters the capital loss calculation in the first place.
An Exception: Section 1244 Small Business Stock
One category of loss escapes the $3,000 ordinary-income cap. If you bought stock directly from a qualifying small business corporation and the investment goes bad, you can treat the loss as an ordinary loss.11Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock Ordinary losses offset wages and other ordinary income without the $3,000 limit.
The annual ceiling for ordinary loss treatment under Section 1244 is $50,000 for single filers and $100,000 for married couples filing jointly. Anything above those numbers reverts to normal capital loss treatment. To qualify, the corporation must have received no more than $1,000,000 in total money and property for all its stock at the time your shares were issued, and it must have derived more than half its gross receipts from active business operations rather than passive sources like rent, dividends, and interest.11Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock You must also have purchased the stock directly from the corporation for money or property; shares picked up on a secondary market don’t count.
State Rules May Differ
A few states cap capital loss deductions differently for state income tax purposes, with some allowing as little as $500 or nothing at all against state taxable income. If your state has an income tax, confirm whether it conforms to the federal $3,000 limit before assuming your state return will match your federal one.