To claim capital losses on your tax return, you report each sale on Form 8949, net short-term and long-term results on Schedule D, and carry the final figure to line 7 of Form 1040. The maximum net capital loss you can deduct against ordinary income in one year is $3,000, or $1,500 if you are married filing separately, and anything above that carries forward to future years indefinitely.1Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
Which Losses You Can Actually Claim
Federal law lets individuals deduct losses from a trade or business or from a transaction entered into for profit.2Office of the Law Revision Counsel. 26 USC 165 – Losses In practice that means investment property: stocks, mutual funds, bonds, cryptocurrency, and real estate held for rent or investment.
Losses on personal-use property do not go on your return at all. Selling your home, your car, or your furniture for less than you paid produces no deductible loss, no matter how large the drop.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses Homeowners who sell in a down market are the group most often surprised by this.
What You Need Before You Start
For every transaction you need four things: what you sold, when you bought it, when you sold it, and what you received. Your capital loss is the gap between your adjusted cost basis (usually what you paid, plus commissions and similar costs) and the amount you received.4Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss
Brokers send Form 1099-B for securities sales, listing the description, acquisition date, sale date, and gross proceeds; many also report cost basis directly to the IRS.5Internal Revenue Service. Instructions for Form 1099-B Real estate sales generate Form 1099-S showing the proceeds.6Internal Revenue Service. About Form 1099-S, Proceeds from Real Estate Transactions
If you inherited the asset, your basis is generally the property’s fair market value on the date the previous owner died, not what they originally paid.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent So a loss on inherited property only exists if the value fell between the date of death and the date you sold.
Form 8949: Listing Each Sale
Form 8949, “Sales and Other Dispositions of Capital Assets,” is where every individual transaction goes. It has two parts. Part I is for short-term holdings, meaning assets held one year or less. Part II is for long-term holdings, meaning assets held more than one year.8Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses The split matters because short-term and long-term amounts net separately before they meet.
At the top of each part, check the box that matches how your broker reported the transaction: on a 1099-B with basis reported to the IRS, on a 1099-B without basis reported, or not on a 1099-B at all. Then for each sale enter the description in column (a), the acquisition date in column (b), the sale date in column (c), the proceeds in column (d), and the cost basis in column (e).9Internal Revenue Service. Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets Columns (f) and (g) handle adjustments such as wash sales, covered below. Totals from each part flow into Schedule D.
Schedule D: Netting Everything Together
Schedule D is where all your capital transactions combine. Short-term totals from Form 8949 land on lines 1b, 2, or 3, depending on the checkbox category you used. Long-term totals land on lines 8b, 9, or 10.10Internal Revenue Service. Instructions for Schedule D (Form 1040)
Short-term gains and short-term losses combine to produce a net short-term result. Long-term gains and long-term losses combine to produce a net long-term result. If one is a gain and the other a loss, they offset each other. The overall figure appears on line 16, and that is the number that moves to Form 1040.
If line 16 is negative, line 21 is where you apply the $3,000 cap ($1,500 if married filing separately) and enter the amount that will actually reduce your income this year.
Form 1040: Where the Loss Lands
Transfer the capped figure from Schedule D, line 21, to Form 1040, line 7, as a negative number.11Internal Revenue Service. Schedule D (Form 1040) – Capital Gains and Losses That negative reduces your adjusted gross income directly. The 2025 Form 1040 instructions place capital gain or loss on line 7.12Internal Revenue Service. 2025 Instructions for Form 1040
One shortcut: if your only capital activity for the year was capital gain distributions on Form 1099-DIV (no actual sales), you can enter those on line 7 without filing Schedule D or Form 8949.
How the $3,000 Cap Actually Works
Before the cap comes into play, your capital losses offset your capital gains with no dollar limit. $200,000 of losses can wipe out $200,000 of gains, and the $3,000 ceiling never enters the picture. The cap only limits the excess loss left over after gains are absorbed.1Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
That is why a large loss usually plays out across many returns. Someone sitting on a $30,000 net loss with no capital gains would need roughly a decade of $3,000 deductions to fully use it, unless future gains speed things up.
Carrying the Rest to Next Year
Anything above $3,000 automatically carries forward. Excess short-term loss carries as short-term; excess long-term loss carries as long-term.13Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers Carryovers do not expire.
Use the Capital Loss Carryover Worksheet in the Schedule D instructions to figure the amount you bring into the following year. The short-term carryover goes on next year’s Schedule D, line 6; the long-term carryover goes on line 14.10Internal Revenue Service. Instructions for Schedule D (Form 1040) Keep every completed worksheet. If the IRS questions a carryover several years down the line, you’ll need the full trail.
Wash Sales Change What You Enter
The wash sale rule is the most common reason a claimed loss gets disallowed. Sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, and the loss cannot be deducted.14Office of the Law Revision Counsel. 26 USC 1091 – Loss from Wash Sales of Stock or Securities The 30 days runs both directions, so the danger zone is 61 days centered on the sale.
The loss is not gone. It gets added to the basis of the replacement shares, and the old holding period tacks onto them. You’ll see the benefit when you eventually sell the replacement, assuming no further wash sale.
On Form 8949, report a wash sale by entering code “W” in column (f) and the disallowed loss as a positive number in column (g).15Internal Revenue Service. 2025 Instructions for Form 8949 Brokers flag wash sales they can see, but they only see one account. If you sold at a loss in a taxable account and repurchased in a different broker or in your IRA, you are responsible for identifying that wash sale yourself.
Worthless Securities
When a security becomes completely worthless, the tax code treats it as sold for zero on the last day of the tax year it became worthless.2Office of the Law Revision Counsel. 26 USC 165 – Losses That deemed sale date sets both the short- or long-term character of the loss and the year you can claim it.
Report the loss on Form 8949, Part I or Part II depending on how long you held it, using December 31 as the sale date and zero as proceeds.16Internal Revenue Service. Losses (Homes, Stocks, Other Property) 1 Proving worthlessness is the hard part. A stock still trading at a fraction of a cent is not yet worthless. Keep bankruptcy filings, delisting notices, or similar documentation for the year you claim the loss.
Section 1244 Small Business Stock
One category of loss escapes the $3,000 cap entirely. If you bought stock directly from a small domestic corporation (not on the secondary market) and it later lost value, Section 1244 lets you treat up to $50,000 of the loss as an ordinary loss, or $100,000 on a joint return.17Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock
Ordinary loss treatment means the loss reduces your income directly with no annual cap, which changes the math dramatically on a failed small business investment. Any loss above the $50,000 or $100,000 ceiling reverts to normal capital-loss treatment. The stock has to have been issued to you (or to a partnership you belonged to) in exchange for money or property, not received as compensation and not bought from another shareholder.