Can I offset capital gains with business losses from my LLC?

Thanks for the response. My business is an LLC that's taxed as a sole proprietorship (single-member LLC). I'm definitely actively involved in the business - I work on it daily. So from what you're saying, I can use my Schedule C losses to offset my capital gains? Are there any limits to how much I can offset?

If your LLC is taxed as a sole proprietorship, your business losses will flow through to your personal tax return on Schedule C. These losses can offset other ordinary income on your return, reducing your overall taxable income. There are some limitations to be aware of. Business losses are first used to offset ordinary income. If your business losses exceed your ordinary income, the excess can potentially offset capital gains. However, the Tax Cuts and Jobs Act implemented a limitation on excess business losses for individuals - for 2023, this limit is $289,000 for individuals ($578,000 for joint filers). Losses above this threshold would be carried forward.

Does taxr.ai actually work with complicated business situations? I've got a similar issue but with rental property losses and stock gains. Most tax software seems to get confused when I input everything.

I'm a little skeptical about these online tax services. Can they really handle something as complicated as business loss carryovers and capital gains offsets? Did they explain exactly which forms you needed to file?

Yes, it definitely works with complicated situations. The platform can analyze rental property losses alongside investment gains - that's actually one of their specialties. They'll break down exactly how the passive activity rules apply in your specific case. Absolutely they explained the forms - that was actually the most helpful part. They provided a complete checklist of forms (in my case Schedule C, Schedule D, Form 8949, and a few others) and exactly how they interact with each other. They even identified a specific provision that my regular accountant had missed about how business expenses could be categorized to maximize the offset against capital gains.

How does this service actually work? Do they just wait on hold for you? Seems like something I could do myself if I just put my phone on speaker and did other things.

Come on, this can't actually work. The IRS phone system is completely broken - I've called dozens of times this year and never reached a human. No way some service can magically get through when millions of people can't.

They have a system that navigates all the IRS phone menus for you, selects the right options, and waits on hold. When they finally reach an actual IRS agent, they call you and connect you directly to that agent. Yes, technically you could do it yourself, but it would mean sitting through hours of hold music and menu options. The difference is they have multiple lines going simultaneously and understand exactly which options to select for different issues. The time it saved me was honestly worth it - I spent my time working instead of listening to hold music for hours. Plus, I was able to get a definitive answer about my specific situation regarding business loss offsets.

This is wrong information. The $3,000 limit applies to CAPITAL losses offsetting ordinary income, not BUSINESS losses. Business losses on Schedule C aren't subject to the same limitations as capital losses. But there are different limitations under the excess business loss rules.

You're right, I should have been more clear. The $3,000 limit applies to capital losses offsetting ordinary income, not business losses. I was trying to point out that if OP also has some capital losses from other investments, those would be subject to different rules than their business losses. Business losses on Schedule C are considered ordinary losses and can generally offset ordinary income without the $3,000 limitation, though as you mentioned, they are subject to the excess business loss limitations (currently around $289,000 for individuals).

I went through an audit two years ago specifically on this issue. The key was documentation of my material participation in the business. The IRS wanted proof that I was actively involved and that the losses were legitimate business expenses. Keep detailed records of time spent, decisions made, meetings, emails, etc. Also, make sure your business has a genuine profit motive - they look closely at that.

Your accountant is right to be cautious - documentation is absolutely critical. I helped a friend through an audit on this exact issue last year. The IRS will want to see proof that your LLC losses are legitimate business expenses and not hobby losses. Keep receipts for everything, maintain a business diary showing hours worked, save all business-related emails and communications, and document any business meetings or decisions you make. They'll also scrutinize whether you're treating it like a real business - separate bank accounts, proper bookkeeping, marketing efforts, etc. The more professional your documentation, the smoother any potential audit will go.

This is really helpful advice about the hobby loss rules! I'm actually in year 4 of losses with my LLC too, so this hits close to home. The 3-out-of-5-years rule is something I hadn't fully considered when thinking about offsetting my capital gains. I've been keeping basic records, but sounds like I need to step up my documentation game significantly. The business diary idea is smart - I do put in substantial time trying to turn things around, but I haven't been formally tracking those hours. One question - if I'm already in year 4 of losses, does that mean I'm automatically at risk for hobby loss classification, or do I still have time to show profitability before it becomes a major issue? And does the fact that I'm using these losses to offset substantial capital gains make the IRS more likely to scrutinize the business legitimacy?

You're not automatically at risk just because you're in year 4 of losses, but you do need to be more careful about documentation. The 3-out-of-5-years rule is a safe harbor - if you meet it, there's a presumption that you're operating a legitimate business. If you don't meet it, the IRS can challenge the business purpose, but you can still defend it with proper documentation. The key is showing genuine profit motive through your actions, not just your results. Document your business plan, market research, changes you've made to improve profitability, professional development or training you've undertaken, and any business advice you've sought. The fact that you're actively trying to turn things around is important. Using business losses to offset substantial capital gains doesn't automatically trigger more scrutiny, but it does make your return more likely to be noticed if there are other red flags. The IRS computers look for patterns and ratios that seem unusual. That's why documentation is so critical - if you ever get questioned, you want to be able to prove this is a legitimate business operation, not a tax shelter. Start that business diary now and be detailed about the time and effort you're putting in. Even if you're in year 4 of losses, demonstrating serious business activity and profit motive can help protect your position.

This is a really important point about NIIT that I hadn't considered! I'm definitely going to be close to those income thresholds with my capital gains, so using my LLC losses to reduce my AGI could save me that extra 3.8% tax on top of the regular income tax savings. Do you know if there are any specific strategies for timing when to recognize business expenses or losses to maximize the AGI reduction? Like if I have some business expenses I could pay in December vs January, would it make sense to accelerate them into this tax year to get below the NIIT threshold? Also, regarding estimated payments - since I wasn't expecting these capital gains when I made my Q3 payment, I'm probably going to be short on my estimates. Would the business losses help with the underpayment penalty calculation, or do I need to make a Q4 payment based on what I think my final liability will be after the offset?

Great questions about timing strategies! Yes, accelerating business expenses into this tax year could definitely help you stay below the NIIT threshold. You can prepay legitimate business expenses like equipment purchases, software subscriptions, or professional services if they'll be used in the business. Just make sure they're ordinary and necessary business expenses - the IRS scrutinizes expense timing when there are obvious tax benefits. For estimated payments, your business losses will reduce your overall tax liability, which affects the underpayment penalty calculation. The penalty is based on the amount you should have paid versus what you actually paid. If your business losses significantly reduce your final tax bill, you might not owe a penalty even if your Q3 payment seemed short before considering the losses. However, I'd recommend calculating a rough estimate of your final liability now (capital gains minus business losses minus other deductions) and considering a Q4 payment if you'll still owe a substantial amount. The safe harbor rule says if you pay 100% of last year's tax liability (110% if your prior year AGI exceeded $150,000) through withholding and estimated payments, you won't owe penalties regardless of what you end up owing this year. Given the complexity with NIIT thresholds and estimated payments, this might be worth a consultation with a tax professional to run the numbers properly.

This is an excellent strategic point that I think many people overlook! The tax rate arbitrage between long-term capital gains (15-20%) and ordinary income rates (potentially 22-37%) is really important to consider. I'm curious though - are there any limitations on how long you can carry forward business losses from an LLC? I know NOLs have specific rules, but since this is Schedule C income from a single-member LLC, does it follow the same carryforward rules as regular NOLs? Also, for someone in the original poster's situation where the business has been losing money for 4 years, would the IRS look more suspiciously at someone who chooses to carry forward losses rather than use them immediately against capital gains? It seems like it could raise questions about whether you're truly trying to make the business profitable or just managing it for tax benefits. The scenario modeling idea is smart though - especially if there's a reasonable expectation that the business will turn around and generate significant income in the next year or two. Thanks for bringing up this longer-term perspective!

You raise a really important point about the strategic timing of loss utilization! For Schedule C losses from a single-member LLC, they do follow NOL carryforward rules - they can be carried forward indefinitely under current law (this changed from the old 20-year limit). Regarding the IRS scrutiny concern - you're right that having 4 years of losses already puts the business under potential hobby loss scrutiny. However, choosing to carry forward some losses isn't inherently suspicious if you can demonstrate a legitimate business strategy. The key is documentation showing you're making genuine efforts to achieve profitability. What matters more to the IRS is whether your business activities show profit motive - are you actively marketing, adapting your business model, seeking professional advice, etc.? Strategic tax planning (like optimizing when to use losses) is actually evidence of treating it like a real business, not a hobby. That said, @027e8d53b444 makes an excellent point about rate arbitrage. If your current capital gains are taxed at 15% but you expect future business income at 24%+, saving some losses could save you significantly more in taxes. Just make sure you document the business rationale for continuing operations and your efforts to achieve profitability - that's what protects you from hobby loss challenges, not the timing of when you claim the losses.

This is a really insightful point about the uncertainty of future tax law changes! The potential sunsetting of TCJA provisions after 2025 is definitely something I hadn't considered when thinking about loss carryforward strategies. You're absolutely right about the cash flow benefits too. Getting immediate tax relief from using losses against current capital gains means actual money back in your pocket now that could be reinvested in the business or used to help turn it around. There's real value in having that cash flow certainty versus hoping for potentially better tax savings years down the road under rules that might not even exist. The tax law uncertainty cuts both ways though - what if loss limitation rules become more restrictive? Then having used losses now against capital gains at known rates would look like the smart move in hindsight. I think this discussion has really highlighted how complex the strategic considerations are beyond just the basic mechanics of offsetting capital gains with business losses. Between hobby loss rules, NIIT thresholds, estimated payment requirements, rate arbitrage opportunities, and tax law uncertainty, there are so many moving pieces. Definitely reinforces the value of working with a tax professional to model out different scenarios based on your specific situation. Thanks for adding that perspective about the broader tax policy landscape - it's easy to get focused on optimizing under current rules and forget they might change!

This is excellent practical advice! The "dry run" approach with tax software is really smart - I wish I had thought of that when I was dealing with my situation. Seeing how all the schedules interact before you finalize everything could save a lot of headaches and potentially catch optimization opportunities you might miss otherwise. Your point about documenting business model changes is particularly valuable for anyone in the original poster's situation with multiple years of losses. I'm actually dealing with something similar right now and have been keeping a business journal of the strategic pivots I'm making, market research I'm conducting, and advice I'm seeking from mentors. It's reassuring to hear that even these basic steps can help demonstrate legitimate profit motive to the IRS. One question - when you did your dry run, did you find that the order of how you entered business expenses made any difference in the final calculation? Or does the tax software generally optimize the categorization automatically? I'm wondering if there are manual adjustments worth considering when the stakes are higher with substantial capital gains to offset. This whole thread has been incredibly educational. Between the technical tax rules, strategic timing considerations, documentation requirements, and now practical implementation tips, it's given me a much more comprehensive understanding of how to approach this type of situation properly.

Great question about expense categorization! In my experience, the order of entry doesn't typically affect the final calculation since tax software follows IRS rules for how different types of income and losses interact. However, I did find that some business expenses could be categorized in multiple ways (like home office expenses that could go on Form 8829 vs. directly on Schedule C), and the software doesn't always choose the most beneficial approach automatically. For someone with substantial capital gains to offset, it's worth reviewing each expense category to make sure you're maximizing the business loss. For example, if you have equipment purchases, make sure you're taking advantage of Section 179 depreciation if it benefits your situation more than regular depreciation. The software usually defaults to standard approaches that work for most people, but with higher stakes, manual review can be worthwhile. One thing that really helped me was printing out a draft return and reviewing it line by line to understand how each number flowed through the forms. It's tedious but gave me confidence that everything was optimized for my specific situation. Given the complexity of your situation with multi-year losses and capital gains, this level of detail could be really valuable. Your business journal approach sounds perfect - exactly the kind of documentation that shows genuine business activity and profit motive. Keep it up!

Great question about state tax implications! You're absolutely right that state rules can differ significantly from federal treatment. California is particularly tricky because they don't always conform to federal tax changes and have their own limitations on business losses. From what I understand, California generally follows federal rules for allowing business losses to offset other income, but they have some differences in timing and limitations. For example, California didn't conform to some of the federal NOL changes from recent tax acts, so the carryforward periods and utilization rules might differ. For your photography LLC situation, you'll want to make sure California recognizes your business losses the same way the federal return does. Some states are more restrictive about what constitutes a legitimate business versus a hobby, and California can be particularly aggressive about reclassifying activities. I'd recommend checking with a California tax professional who understands both the federal offset rules and California's specific provisions. The general services like taxr.ai might help with federal questions, but state-specific issues usually require someone familiar with California tax code. Your documentation approach is smart - California audits can be even more thorough than federal ones, so having detailed records of your business activities and profit-seeking efforts will serve you well regardless of which jurisdiction reviews your return.

Welcome to the community, Ethan! This thread has been amazing for learning about these complex interactions between business losses and capital gains. For getting started systematically, I'd recommend this order: First, gather your basic numbers - total capital gains from your mutual fund sales, total LLC losses for the year, and your expected other income. This gives you a rough idea of whether the offset will be substantial enough to warrant detailed planning. Second, start documenting your LLC activities immediately if you haven't already - time logs, business emails, marketing efforts, any steps you're taking to improve profitability. As others mentioned, this documentation becomes critical if there are ever questions about legitimate business purpose vs. hobby classification. Third, do a preliminary calculation using tax software or worksheets to see how the numbers flow together and whether you'll be close to any thresholds (like the NIIT limits mentioned earlier). This helps you understand the potential tax impact before investing in professional advice. Finally, if the numbers are significant or you're close to important thresholds, that's when I'd bring in a tax professional who can help with the strategic timing decisions and state-specific considerations that several people raised. The systematic approach helps you focus professional consultation time on the high-value strategic questions rather than spending money on basic calculations you can do yourself first. Good luck with your situation!

Welcome Pedro! Great question about cryptocurrency taxation - this adds another layer of complexity to your situation that's definitely worth understanding. The treatment of your crypto gains will depend on exactly what you described - how the IRS classifies your trading activity. If your crypto sales are from long-term holdings (held over a year), they'll be treated as capital gains just like stocks and can be offset by your LLC losses in the same way discussed throughout this thread. However, if your shorter-term trading activity is frequent enough, the IRS might classify you as a trader, which means those gains could be treated as ordinary income rather than capital gains. This distinction actually works in your favor for offsetting with business losses! Ordinary income from trading can be directly offset by your LLC losses without the complexities of capital gains offset rules. But it also means you might owe higher tax rates on those gains (ordinary income rates vs. preferential capital gains rates). The key is documentation - keep detailed records of which crypto transactions were investments (held long-term) versus trading activity. The IRS looks at factors like frequency of transactions, holding periods, and whether you're seeking short-term profits vs. long-term appreciation. Given the complexity of mixing LLC losses with both types of crypto gains, this might be a great case for professional consultation to make sure you're optimizing the treatment of each type of gain. The strategies discussed earlier about timing and documentation apply even more strongly when crypto is involved since the IRS is paying increased attention to crypto reporting compliance.

Welcome to the community, Mateo! Your situation with pivoting your consulting focus while dealing with multiple years of losses is actually quite common, and you're asking exactly the right questions about how the IRS views business pivots. The good news is that actively changing your business model to pursue profitability is generally viewed favorably by the IRS when evaluating profit motive. It shows you're responding to market conditions and making genuine efforts to become profitable rather than just continuing an unsuccessful approach. The key is documentation - keep records of your market research that led to the pivot decision, any professional advice you sought, competitor analysis, and the strategic reasoning behind your new focus area. Your software development tools, marketing expenses, and professional development costs for the pivot are all legitimate business expenses that demonstrate profit-seeking behavior. The IRS actually looks for businesses to adapt and evolve - staying static in an unprofitable model would be more concerning from a hobby loss perspective. I'd recommend documenting your pivot strategy in writing - create a business plan or strategic analysis that explains why you're changing direction, what market opportunities you've identified in the new niche, and your timeline for achieving profitability. This kind of documentation shows sophisticated business thinking rather than hobby-level activity. Also, since you're in year 3 of losses, this pivot could be perfect timing to demonstrate the serious business changes you're making to achieve the profitability the IRS expects. Your situation actually sounds like a textbook case of legitimate business evolution rather than hobby loss concerns.