The tax on a long-term capital loss isn’t really a tax at all — it’s a deduction. A loss on an investment you held for more than a year first cancels out your capital gains dollar-for-dollar, then knocks up to $3,000 off your ordinary income for the year. Anything left over carries forward to future years with no expiration date. Used well, a single bad year in the market can keep trimming your tax bill for a decade or more.
What Makes a Capital Loss Long-Term
A loss is long-term when you sell an investment you’ve owned for more than one year at a price below what you paid.1Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses The holding clock starts the day after you buy and runs through the day you sell. Shares bought on March 15, 2025 can’t produce a long-term loss until you sell them on March 16, 2026 or later. Sell one day early and you have a short-term loss, which matters when the numbers get netted.
Most investment assets qualify: stocks, bonds, mutual funds, ETFs, real estate held for investment, and cryptocurrency. What matters is how long you held it and whether you held it for investment rather than personal use.
Personal-Use Property Doesn’t Count
Losses on your home, car, furniture, or other personal property are not deductible. Federal law limits individual loss deductions to assets used in a trade or business or held in a transaction entered into for profit.2Office of the Law Revision Counsel. 26 USC 165 – Losses The IRS is explicit that losses from selling personal-use property like your home don’t qualify for the capital loss deduction.3Internal Revenue Service. What if I Sell My Home for a Loss? If you converted a personal residence to a rental before selling, different rules apply and the adjusted basis question is worth putting to a tax professional.
How Long-Term Losses Offset Gains
The IRS doesn’t look at transactions one at a time. You net everything in a set order. Long-term losses first reduce long-term gains. Any remaining long-term loss then offsets short-term gains. Short-term losses work the other direction, hitting short-term gains first and then long-term.
Order matters because the two categories are taxed differently. Long-term gains get preferential rates of 0%, 15%, or 20% depending on your taxable income; short-term gains are taxed at your ordinary rate, which runs as high as 37%.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses When a long-term loss cancels a short-term gain, you’re erasing income that would have been taxed at the higher ordinary rate. That’s where the biggest savings show up.
If you’re a higher earner, capital losses also reduce your exposure to the 3.8% net investment income tax, which applies once modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.5Internal Revenue Service. Net Investment Income Tax Losses shrink net investment income, which can lower or eliminate the surtax.
The $3,000 Deduction Against Ordinary Income
After all the netting, if you still have a net capital loss, you can deduct up to $3,000 of it against ordinary income — wages, salary, interest. Married filing separately, the cap is $1,500.6Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses That deduction reduces your adjusted gross income, and a lower AGI can improve your eligibility for credits and other deductions that phase out at higher income levels.
The $3,000 cap has been in place since 1978 and isn’t indexed for inflation. For an investor sitting on a large loss, the deduction drips out slowly across many returns.
Carrying Losses Forward
Any net capital loss above the $3,000 annual deduction carries forward to the next year, with no expiration date.7Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers Each future year, the carryforward offsets that year’s capital gains first, and then up to $3,000 of ordinary income if anything remains.
Losses keep their original character. A long-term loss carried forward stays long-term; a short-term loss stays short-term.7Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers You need to track the balance yourself or through tax software. The IRS provides a Capital Loss Carryover Worksheet in the Schedule D instructions.
One planning point people miss: unused carryforwards die with you. They can be applied on your final income tax return, but any remaining balance does not pass to your estate or your surviving spouse.8Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators If you’re sitting on a large carryforward and are in poor health, accelerating gain recognition to absorb the losses first may be worth modeling with an advisor.
The Wash Sale Rule
You can’t sell an investment at a loss and buy the same thing right back to grab the deduction. If you purchase a substantially identical security within a 61-day window — 30 days before the sale through 30 days after — the loss is disallowed for that year.9Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The disallowed amount is added to your cost basis in the replacement shares, so the benefit is postponed rather than lost, but it doesn’t help this year’s return.
The rule reaches further than most investors realize. It applies if you buy the identical security in a different account, including an IRA, and it applies if your spouse buys it. Automated dividend reinvestment plans can trigger a wash sale without any action on your part, so watch those around year-end tax-loss harvesting.
Cryptocurrency Is Currently Outside the Rule
As of 2026, the wash sale rule applies only to stock and securities. The IRS treats digital assets as property, so you can sell Bitcoin at a loss and repurchase it immediately while claiming the full loss. Proposals to close this gap have surfaced repeatedly since 2021, but none have been enacted.
Inherited and Worthless Securities
Inherited investments are automatically treated as held for more than one year, no matter how long the deceased owned them or how quickly you sell.10Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property Combined with the stepped-up basis rule, which resets cost basis to fair market value on the date of death, this makes any loss on inherited property long-term by default.
If a security becomes completely worthless, you don’t need an actual sale to claim the loss. Tax law treats it as sold for zero dollars on the last day of the tax year.2Office of the Law Revision Counsel. 26 USC 165 – Losses Whether that loss is long-term depends on your holding period measured through December 31. Shares bought in February 2025 in a company that went bankrupt in June 2026 give you a deemed sale on December 31, 2026, producing a holding period of more than a year and a long-term loss.11Internal Revenue Service. Losses (Homes, Stocks, Other Property) 1
How to Report the Loss
Your brokerage sends Form 1099-B after year-end, listing sale proceeds, acquisition dates, and cost basis for each transaction.12Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions You transfer that information to Form 8949 to calculate the gain or loss on each sale. Long-term transactions go in Part II; short-term in Part I.
Totals from Form 8949 flow to Schedule D of Form 1040, where the netting happens. Schedule D combines your short-term and long-term results, applies the $3,000 ordinary income deduction if you have a net loss, and calculates the carryforward for next year. Prior-year carryforwards are entered here too. Tax software handles this automatically. By hand, the Capital Loss Carryover Worksheet in the Schedule D instructions walks through the math step by step.