The IRC 1211 capital loss limitation caps how much of your net capital losses you can subtract from other income in a single year. If you are an individual, that ceiling is $3,000 against ordinary income, or $1,500 if you are married filing separately, and only after your losses have first been netted against any capital gains.1Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses If you are a corporation, the rule is stricter: capital losses can offset capital gains and nothing else. Anything you cannot use in the current year does not disappear. It carries over, under rules that differ sharply between individuals and corporations.
How the $3,000 Individual Cap Works
Section 1211(b) sets up a two-step process. First, you offset capital losses against capital gains for the year. If losses still exceed gains, the leftover amount reduces ordinary income from wages, interest, and other sources, but only up to the lesser of $3,000 ($1,500 if married filing separately) or the actual excess loss.1Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses The lesser-of piece matters. If your net capital loss is only $1,800, you deduct $1,800, not $3,000.
A worked example. Say you sold stocks for a combined $12,000 loss and had $5,000 in capital gains during the same year. Your net capital loss is $7,000. You use $3,000 of that to reduce your taxable wages this year, and the remaining $4,000 carries forward. If you had no capital gains at all and lost $12,000 outright, the current-year deduction is still $3,000, and $9,000 rolls into next year.
The cap has not moved since Congress set it in 1976 for tax years beginning after 1977. It is not indexed for inflation. Taxpayers with sizable realized losses routinely carry balances forward for many years before using them up.
The Corporate Rule Is Stricter
Under Section 1211(a), a corporation can deduct capital losses only up to the amount of its capital gains for the same tax year.1Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses There is no $3,000 allowance against ordinary income. A corporation that sells investments at a $500,000 loss and has zero capital gains gets no current-year deduction against operating income. The rule effectively separates investment activity from operating income for tax purposes.
Carrying Unused Losses Forward
Section 1211 caps the current-year deduction; Section 1212 handles what happens to the rest.
Individuals: Indefinite Carryforward
When your net capital loss exceeds the annual limit, the unused portion carries forward to the next year and keeps its character. Short-term stays short-term, long-term stays long-term.2Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers There is no expiration. You can carry losses forward until you have used them up, whether by offsetting future capital gains or by taking the $3,000 annual deduction against ordinary income year after year.
To calculate the carryover, use the Capital Loss Carryover Worksheet in the Schedule D instructions. It splits the unused loss into short-term and long-term components, which you enter on the following year’s Schedule D.3Internal Revenue Service. Instructions for Schedule D (Form 1040) (2025) One detail catches people: if you filed jointly the year the loss arose and file separately the next year, only the spouse who actually sustained the loss can claim the carryover.
Corporations: Three Back, Five Forward
A corporate net capital loss can be carried back three years and applied against capital gains in those earlier years, potentially producing a refund. Any remaining loss carries forward for up to five years and then expires.2Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers All corporate carrybacks and carryovers are treated as short-term regardless of their original character. The carryback cannot create or increase a net operating loss in the year it is applied to.
Netting Order Before the Cap Applies
The IRC 1211 limit operates on your net figure, not on gross losses, so the netting sequence changes what you actually deduct. Short-term gains and short-term losses combine first. Long-term gains and long-term losses combine separately. The two results are then combined against each other.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The character split matters because the tax rates differ. Short-term gains are taxed as ordinary income; long-term gains get preferential rates. A short-term loss does the most work when it wipes out a short-term gain that would otherwise face your full marginal rate. Assets held one year or less are short-term; anything longer is long-term. All of this happens on Schedule D, and only after the netting does the $3,000 cap come into play.
What Doesn’t Qualify: Personal-Use Property
Losses from selling personal-use property, such as your home, your car, or household furniture, are not deductible at all.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses Gains on those items are taxable, but losses give you no tax benefit. IRC 1211 applies only to capital assets held for investment or used in a trade or business. Homeowners selling at a loss are the most common surprise here.
Rules That Can Block, Preserve, or Upgrade a Loss
Wash Sales Disallow the Loss
IRC 1091 can disallow a capital loss deduction outright. If you buy the same or a substantially identical stock or security within 30 days before or after the sale that produced the loss, the loss is disallowed.5Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The rule also catches replacement purchases made in your IRA or Roth IRA, by your spouse, or by a corporation you control.6Internal Revenue Service. Publication 550, Investment Income and Expenses Stocks of different companies are generally not substantially identical, so swapping one bank stock for another is usually fine.
A disallowed loss is not lost. It gets added to the cost basis of the replacement shares, and the holding period of the old shares tacks onto the new ones. Sell at a $2,000 loss and repurchase for $10,000, and your new basis is $12,000. You recover the tax benefit when you eventually sell the replacement, assuming no fresh wash sale.
Worthless Securities
You do not need an actual sale to claim a loss on a security that has become completely worthless. Under IRC 165(g), a security that becomes wholly worthless during the tax year is treated as if you sold it on the last day of that year for zero.7GovInfo. 26 USC 165 – Losses The deemed sale date fixes whether the loss is short-term or long-term. You must claim the deduction in the exact year the security became worthless. Once claimed, worthless-security losses run through the same IRC 1211 machinery: capital gains first, then up to $3,000 against ordinary income.
Section 1244 Small Business Stock
IRC 1244 lets you treat certain small business stock losses as ordinary rather than capital. Up to $50,000 of loss per year ($100,000 on a joint return) on qualifying stock can bypass the $3,000 cap entirely and reduce ordinary income dollar for dollar.8Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock To qualify, the corporation must have issued the stock directly to you (not a secondary-market purchase), the corporation must have received no more than $1,000,000 in total paid-in capital at issuance, and more than half of its gross receipts must come from active business operations rather than passive sources like rents, royalties, or dividends. Any loss above the $50,000 or $100,000 limit falls back into capital loss treatment under IRC 1211.
Reporting the Loss
Every capital asset sale is reported on Form 8949, which reconciles your records with the Form 1099-B your brokerage sends the IRS.9Internal Revenue Service. Instructions for Form 8949 (2025) Short-term transactions go in Part I, long-term in Part II, each line showing acquisition date, sale date, proceeds, and cost basis.
Form 8949 totals flow into Schedule D, which combines everything and produces your net capital gain or loss for the year. Both forms are filed with your Form 1040. If your net loss exceeds the $3,000 limit, complete the Capital Loss Carryover Worksheet in the Schedule D instructions to determine how much moves into next year’s return.