A loss carryforward is a tax provision that lets you apply an unused net operating loss or capital loss from a prior year against income in a later year, lowering what you owe then. The two main flavors work differently: individuals can deduct up to $3,000 of net capital losses against ordinary income each year and roll the rest forward indefinitely, while business net operating losses (NOLs) arising after 2017 can offset up to 80 percent of taxable income in any future year with no expiration date.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses2Internal Revenue Service. Tax Cuts and Jobs Act – A Comparison for Businesses The rest comes down to which type of loss you have, which caps apply, and how to get the numbers onto the right line.
Losses That Can Be Carried Forward
Net Operating Losses
An NOL arises when your allowable deductions exceed your gross income for the year.3Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction It shows up most often in businesses with heavy startup costs, cyclical revenue, or a year of unexpected expenses. NOLs apply to C corporations, sole proprietors, partners, and S corporation shareholders, though the mechanical rules vary by entity.
Capital Losses
A capital loss happens when you sell an investment asset for less than what you paid. Losses are classified as short-term (held one year or less) or long-term (held longer than one year), and that classification survives into the carryforward.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Corporations face a tighter rule than individuals: their capital losses can only offset capital gains, never ordinary income.4Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses A corporation with $200,000 of capital losses and no capital gains deducts nothing that year and carries the full amount forward.
Worthless Securities
If a stock or bond you own becomes completely worthless, the tax code treats it as sold on the last day of the tax year for zero, generating a capital loss you can carry forward under the normal rules.5eCFR. 26 CFR 1.165-5 – Worthless Securities The original holding period still controls whether the loss is short-term or long-term. You don’t need to sell on an exchange; formal abandonment or evidence of total worthlessness is enough.
Annual Caps on What You Can Deduct
Individual Capital Losses: The $3,000 Cap
If your capital losses exceed your capital gains, you can deduct up to $3,000 of the excess against ordinary income each year ($1,500 if married filing separately).1Internal Revenue Service. Topic No. 409, Capital Gains and Losses Anything beyond that rolls into the next year, keeping its short-term or long-term character. There is no time limit on how long an individual can carry a capital loss forward.
Corporate Capital Losses: Three Back, Five Forward
Corporations can carry unused capital losses back three years and forward five, and all carried amounts are treated as short-term regardless of their original character.6Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers The five-year window is much tighter than what individuals get, so corporations sitting on large losses sometimes time asset sales to generate enough gains to absorb the carryover before it expires.
The 80 Percent NOL Limit
For NOLs arising in tax years after December 31, 2017, the deduction in any carryforward year is capped at 80 percent of taxable income, calculated without the NOL itself.2Internal Revenue Service. Tax Cuts and Jobs Act – A Comparison for Businesses A business with $500,000 of taxable income and $1 million of NOL carryforward can only deduct $400,000 this year, leaving $600,000 to carry forward again. The other 20 percent of income is always taxable. That is the trade-off Congress made for removing the old expiration date.
Losses from tax years before 2018 follow the prior rules: a 20-year carryforward and no percentage cap, but they expire if unused.7Internal Revenue Service. 4.11.11 Net Operating Loss Cases If you hold both vintages, use the older losses first because they are the ones at risk of expiring.
The Excess Business Loss Gate
Before non-corporate taxpayers even reach the NOL rules, Section 461(l) blocks part of a current-year loss from offsetting non-business income. For 2026, business losses above $256,000 ($512,000 on a joint return) cannot be deducted against non-business income that year.8Internal Revenue Service. Revenue Procedure 2025-32 The excess converts into an NOL carryforward for the next year, where the 80 percent cap takes over. The threshold adjusts annually for inflation.
Carrybacks Are Mostly Gone
The Tax Cuts and Jobs Act eliminated carrybacks for most taxpayers. Two categories still get them: farming losses can be carried back two years unless the taxpayer elects out,9Internal Revenue Service. Publication 225 (2025), Farmers Tax Guide and non-life insurance companies retain a two-year carryback with a 20-year carryforward.3Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction Outside those categories, carryback is unavailable for losses arising after 2017.
How to Report a Carryforward
Capital Loss Carryovers
Prior-year short-term capital loss carryovers go on line 6 of Schedule D (Form 1040), and long-term carryovers on line 14.10Internal Revenue Service. Schedule D (Form 1040) The numbers come from the Capital Loss Carryover Worksheet in the Schedule D instructions, which splits the carryover back into short-term and long-term pieces.11Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) Most e-filing software pulls the figures forward automatically, but check them against your worksheet because an error here compounds every year.
Individual NOL Deductions
An individual’s NOL deduction from a prior year goes on Schedule 1 (Form 1040), line 8a, entered as a negative number.12Internal Revenue Service. 2025 Schedule 1 (Form 1040) It reduces your adjusted gross income directly.
Corporate NOL Deductions
Corporations enter the NOL deduction on Form 1120, line 29a, limited to taxable income after special deductions. The IRS requires an attached statement showing the computation.13Internal Revenue Service. Instructions for Form 1120 (2025)
Fixing a Missed Carryforward
If you filed and later realize you forgot a carryforward or entered the wrong amount, file Form 1040-X to amend. The same form is used to claim a carryback for a loss or unused credit.14Internal Revenue Service. About Form 1040-X, Amended U.S. Individual Income Tax Return You generally have three years from the original filing date or two years from the date you paid the tax, whichever is later.
Rules That Can Trap or Shrink a Carryforward
Passive Activity Losses
If you own an interest in a business but do not materially participate in its operations (rental real estate is the classic example), losses from that activity can only offset income from other passive activities. The excess is suspended and carried forward.15Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited These suspended losses can stack up for years.
The release valve is disposing of your entire interest in the activity in a fully taxable transaction. When you sell the rental property or liquidate the partnership interest, all accumulated suspended losses become deductible against any type of income. A sale to a related party does not trigger the release until the interest reaches an unrelated buyer.15Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
At-Risk Limits
Separately, you can only deduct losses up to the amount you have at risk in an activity, roughly the money you invested plus amounts you personally borrowed and are liable for.16Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk Losses blocked by the at-risk rules carry forward and become deductible the first year your at-risk amount rises enough to absorb them. Real estate investors using nonrecourse debt run into this often, because nonrecourse borrowing generally does not count as at-risk (with a carve-out for certain qualified real estate financing).
Ownership Changes Under Section 382
When more than 50 percent of a corporation’s stock changes hands within a three-year testing period, Section 382 sharply caps how much of the company’s pre-change NOLs can be used each year. The annual cap equals the fair market value of the old loss corporation multiplied by the long-term tax-exempt rate published by the IRS, which often produces a surprisingly small number relative to the total NOL.17Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change If the acquirer stops operating the old business within two years of the change, the annual limit drops to zero, effectively wiping out the remaining carryforward.
Death of the Taxpayer
An individual’s unused NOL and capital loss carryovers can only be claimed on the decedent’s final income tax return. They cannot be deducted on the estate’s income tax return.18Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators A decedent with $80,000 of capital loss carryforward and only $5,000 of income on the final return loses most of it. There is a partial safety net at the back end: any unused NOL or capital loss carryover remaining when an estate formally closes passes to the beneficiaries who succeed to the estate’s property, retaining its character (except a corporate beneficiary treats all capital loss carryovers as short-term).19eCFR. 26 CFR 1.642(h)-1 – Unused Loss Carryovers on Termination of an Estate or Trust The beneficiary’s first eligible year is the year the estate terminates.
Small Business Stock: An Ordinary-Loss Alternative
A loss on stock is normally a capital loss, subject to the $3,000 annual cap. Section 1244 provides an exception for stock in qualifying small businesses: up to $50,000 of losses ($100,000 on a joint return) can be treated as ordinary losses, fully deductible against wages, interest, and other ordinary income in the year of the loss.20Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock The corporation must have had no more than $1 million of total paid-in capital when the stock was issued, the stock must have been issued directly to you for money or property, and the business must have derived more than half its gross receipts from active operations rather than passive sources over its five most recent tax years. Any loss above the Section 1244 cap reverts to capital loss treatment and follows the usual carryforward rules.
State Rules Vary
State income tax rules for loss carryforwards differ significantly. Most states with a corporate income tax allow some form of NOL carryforward, but the permitted period ranges from as few as five years to indefinite. Some states conform to the federal 80 percent cap, others impose their own percentage caps or dollar ceilings, and a handful have temporarily suspended NOL deductions entirely during budget shortfalls. A loss that carries forward indefinitely on your federal return may expire much sooner on your state return, so check your state’s current-year provisions before relying on the federal timeline.