Tax Loss Carryover: Rules, Calculation, and Reporting

A tax loss carryover is the portion of a net capital loss that you couldn’t use in the year you incurred it, carried into future tax years to offset capital gains and, up to $3,000 a year ($1,500 if married filing separately), ordinary income. For individuals, the carryover has no expiration date. It keeps rolling forward every year until gains and the annual deduction fully absorb it, or until you die.¹

How a Loss Becomes a Carryover

Before anything carries forward, the IRS makes you net your gains and losses inside two buckets: short-term (assets held one year or less) and long-term (held more than a year).² Short-term losses offset short-term gains first; long-term losses offset long-term gains first. Whatever is left in either bucket then crosses over to reduce a gain in the other.

If a net loss survives that process, you can deduct up to $3,000 of it against ordinary income like wages, interest, and dividends. Married-filing-separately taxpayers are capped at $1,500 each; qualifying surviving spouses get the full $3,000.³ Anything beyond that cap is your carryover.

Say you finish the year with a $25,000 net capital loss. You deduct $3,000 against ordinary income this year and carry $22,000 forward. Next year, that $22,000 first offsets any capital gains you realize. If losses still remain, another $3,000 comes off ordinary income, and the rest keeps rolling.

Carryovers keep their original character. A net short-term loss left over after netting carries into the next year as short-term; a net long-term loss carries forward as long-term.¹ That matters because short-term gains are taxed at ordinary rates while long-term gains get preferential rates, so a carried-forward short-term loss will chew through the more expensive gains first.

Mutual fund capital gain distributions feed into this netting too. Even distributions you reinvested count as long-term gains in the year the fund reports them, and your carryover can offset them.

How Long the Carryover Lasts

For an individual, there is no time limit. The statute simply converts your unused net loss into a capital loss “in the succeeding taxable year,” and repeats that treatment every year until the loss is gone.¹ A loss from a market crash in your thirties can still be reducing your taxes in retirement.

C corporations follow a different rule: five years forward (ten for a loss caused by foreign expropriation).¹ If you hold investments through a corporation rather than personally, the indefinite carryover doesn’t apply.

Calculating the Amount You Carry Forward

The Capital Loss Carryover Worksheet in the Schedule D instructions (identical to the one in IRS Publication 550) tells you exactly how much moves into next year.⁴ You need the worksheet if your Schedule D, line 21, shows a loss and either that loss is smaller than the loss on line 16, or your taxable income on Form 1040, line 15, would be negative if the form allowed negative numbers.⁵

The worksheet gives you two numbers: a short-term carryover and a long-term carryover, each tracked separately. It accounts for the $3,000 deduction you already took and your taxable income for the year. If taxable income was lower than the $3,000, your actual carryover is larger than a simple subtraction would suggest, because you couldn’t fully use the deduction.

Individual sale details come from Form 8949 (with dates, proceeds, and cost basis), which most brokerages populate through Form 1099-B, including whether each trade was short-term or long-term and any wash sale adjustments.⁶⁷ The totals flow to Schedule D, where the netting produces the loss you’ll potentially carry forward.

Keep a copy of Schedule D and the completed carryover worksheet permanently. The IRS does not track your running balance. If you lose the records or skip a filing year, reconstructing the correct carryover means rebuilding every prior year’s worksheet in sequence.

Reporting the Carryover Next Year

On the following year’s return, the short-term carryover goes on Schedule D, line 6, and the long-term carryover on line 14. Tax software usually pulls these amounts forward automatically if you use the same program year to year. Switching software or filing by hand means entering them manually from last year’s worksheet.

If You Forgot to Claim One

You can go back and fix a missed carryover by filing Form 1040-X. The deadline is three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later.⁸ Miss that window and the refund for the closed year is lost, but the underlying carryover itself doesn’t expire; you’d correct the chain of worksheets from the year of the mistake forward.

The Wash Sale Trap

The most common way people accidentally destroy the loss they were trying to generate is by tripping 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 30 days after the sale, the IRS disallows the loss.⁹ That’s a 61-day window counting the sale date itself.

In an ordinary taxable account, the disallowed amount gets added to the cost basis of the replacement shares, so the loss is deferred rather than erased. You’ll recognize it as a smaller gain or larger loss when you eventually sell those replacement shares.⁹

One situation is worse. If you sell at a loss in a taxable account and buy the same security inside an IRA or Roth IRA within the wash sale window, the IRS disallows the loss and the disallowed amount is not added back to any basis you can track. The loss is gone permanently.¹⁰ The rule reaches across accounts, including your spouse’s, so a purchase in a spousal IRA triggers the same result.

“Substantially identical” is not precisely defined in the statute. The IRS looks at facts and circumstances, but stock in two different companies is generally not treated as substantially identical. This is why swapping one broad-market index fund for a different fund tracking a similar but distinct index is a common way to stay invested without disallowing the loss.

What Happens on Death or Divorce

The carryover belongs to the taxpayer who incurred the loss, which creates issues when circumstances change.

Death

Unused carryover can be claimed on the final return for the year of death. If a joint return is filed for that year, the carryover can offset the surviving spouse’s gains on that return. After the year of death, any carryover attributable to the deceased spouse is lost. It does not transfer to the surviving spouse’s later individual returns, and it does not pass to the estate.

For jointly held assets, the carryover is typically split equally, and the surviving spouse keeps their half going forward. If the asset that generated the loss was owned solely by the deceased spouse, the entire carryover belongs to that spouse and ends with the year-of-death return.¹

Divorce

After a divorce that ends joint filing, the carryover follows the spouse who actually incurred the loss.¹¹ Losses from jointly owned assets are typically split equally. In community property states, losses from community property may be allocated according to the divorce settlement. Sorting this out requires pro forma returns prepared as if the couple had filed separately, so it’s worth working through the numbers before the settlement is signed.

Two Categories That Don’t Follow the Normal Cap

Section 1244 Small Business Stock

If you invested in qualifying small business stock and the company failed, up to $50,000 of the loss ($100,000 on a joint return) can be treated as an ordinary loss rather than a capital loss. Ordinary loss treatment bypasses the $3,000 cap entirely and offsets wages, business income, or any other income dollar for dollar. The stock has to have been issued directly to you (or to a partnership you belonged to) by a domestic corporation that received no more than $1,000,000 in total capital contributions, and the company must have earned most of its revenue from active business operations rather than passive sources.¹² Any loss above the $50,000 or $100,000 threshold reverts to capital loss treatment and follows the normal carryover rules.

Section 1256 Contracts

Regulated futures contracts, foreign currency contracts, and certain listed options are Section 1256 contracts. Gains and losses on them are automatically split 60% long-term and 40% short-term regardless of holding period.¹³

Section 1256 net losses are the only individual capital losses that can be carried backward. Elect the carryback on Form 6781 and you can apply the loss against Section 1256 gains from the three preceding tax years, starting with the earliest.¹ The carryback can only offset prior Section 1256 gains and cannot create or increase a net operating loss for any carryback year. You claim the refund with Form 1045 or an amended return that includes an updated Form 6781 and Schedule D for each affected year. Corporations, estates, and trusts cannot make this election.

1
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Office of the Law Revision Counsel. 26 US Code 1211 – Limitation on Capital Losses
4
Internal Revenue Service. Publication 550, Investment Income and Expenses
5
Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
6
Internal Revenue Service. Instructions for Form 8949
7
Internal Revenue Service. Instructions for Form 1099-B
8
Internal Revenue Service. Topic No. 308, Amended Returns
9
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
10
Internal Revenue Service. Revenue Ruling 2008-5
11
eCFR. 26 CFR 1.1212-1 – Capital Loss Carryovers and Carrybacks
12
Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock
13
Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles