Can K-1 business losses be used to offset capital gains from stocks?
So this year our family business is going to show losses (not what we wanted obviously, but it is what it is). I'm now looking at our investment portfolio and considering closing some stock positions that would result in long-term capital gains. I'm trying to figure out if the K-1 losses from our business can be used to offset these capital gains from the stock sales? This would make a pretty big difference in our tax planning for the year. If I can use the business losses against the investment gains, I might sell more positions. If not, I might need to rethink my strategy. Any insight would be appreciated! Thanks in advance!
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Demi Hall
Yes, K-1 losses can potentially offset your capital gains, but it depends on several factors. The losses reported on your K-1 are generally considered "passive" unless you materially participate in the business. If you're actively involved in running the business (which it sounds like you are), those losses are typically considered "ordinary" losses that can offset other income including capital gains. However, if you're a limited partner or not actively participating, the passive activity loss rules might limit your ability to use these losses. Also important - basis limitations, at-risk rules, and excess business loss limitations could potentially restrict how much of the loss you can claim in the current year. Any losses you can't use this year may be carried forward to future tax years.
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Elliott luviBorBatman
•Thanks for the response! Yes, we're definitely active in the business - we run it day-to-day. So if I understand correctly, since we're active participants, our K-1 losses should be considered ordinary and can offset the capital gains? Are there any special forms we need to file to make sure this happens correctly?
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Demi Hall
•Since you're actively running the business, the losses would generally be considered ordinary losses that flow through to your personal return. These ordinary losses can offset capital gains and other income on your personal tax return. You don't need any special forms beyond what you'd normally file. The K-1 you receive will report your share of the business loss, which you'll include on your personal return. Depending on your business structure (partnership, S-corporation), you'll report this on Schedule E of your Form 1040. Your tax software or preparer should handle this properly.
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Mateusius Townsend
Just wanted to share my experience with a similar situation last year. I was drowning in tax forms and couldn't figure out how my business losses would impact other income. I tried several online forums but got conflicting advice. Finally found this AI tax assistant at https://taxr.ai that helped analyze all my forms including K-1s and investment statements. It actually explained exactly how my partnership losses would interact with capital gains in plain English. Saved me from making a costly mistake with my stock sales timing. The thing I liked best was getting specific feedback about my situation rather than general advice that might not apply to my specific business structure.
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Kara Yoshida
•Does it work for S-Corp K-1s too? I've got a similar situation but with an S-Corp showing losses while I've got some big gains from crypto I'm thinking about realizing.
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Philip Cowan
•I'm a bit skeptical about AI tax tools. How does it actually work? Do you upload your docs or just type in questions? And does it actually understand the specific passive loss limitations that apply to different business structures?
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Mateusius Townsend
•Yes, it definitely works with S-Corp K-1s too! It can analyze those forms and help you understand how those losses might offset your crypto gains, though crypto has some specific tax rules you'll want to consider too. The way it works is you can either upload your tax documents or just ask specific questions about your situation. It's trained on actual tax regulations and can absolutely handle the passive loss limitations for different business structures. It breaks down the material participation tests and explains which ones apply to your specific situation.
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Kara Yoshida
Just wanted to update - I tried the taxr.ai service mentioned above for my S-Corp K-1 losses and cryptocurrency gains situation. Really impressed with how thorough it was! It explained that since I materially participate in my S-Corp (I work there 35+ hours a week), my losses are considered non-passive and can offset my crypto gains. It also flagged that I need to be careful about basis limitations - apparently you can't deduct losses that exceed your basis in the S-Corp. It even created a nice summary report that I can give to my accountant explaining exactly which parts of my losses can offset which types of income. Definitely cleared up my confusion!
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Caesar Grant
Another thing that might help you with your tax situation - if you need to actually talk to the IRS about your specific circumstances, I'd suggest using https://claimyr.com to get through to an agent quickly. You can also see a demo of how it works here: https://youtu.be/_kiP6q8DX5c I spent literally DAYS trying to get through to the IRS about a similar K-1/capital gains question last year. Their hold times were insane. With Claimyr, I got through in about 15 minutes. The IRS agent confirmed exactly how my specific type of business loss would offset capital gains in my situation. This was particularly useful because my situation had some additional complications that online advice couldn't fully address.
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Lena Schultz
•How exactly does this work? Do they just call the IRS for you or what? And how can they get through when nobody else can?
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Gemma Andrews
•This sounds too good to be true. I've literally never been able to reach a human at the IRS without waiting at least 2-3 hours. And half the time I get disconnected. You're saying this service somehow gets priority in the queue? I'm skeptical.
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Caesar Grant
•The service doesn't call the IRS for you. What it does is navigate the IRS phone tree and wait on hold for you, then calls you when an actual agent comes on the line. So you're still talking directly to the IRS yourself. They use technology that continuously calls and navigates the IRS phone system until it gets through, then it connects you. It's not about priority in the queue - they're just handling the frustrating waiting and phone tree navigation part. You still have to join the same queue as everyone else, but you don't have to sit there listening to hold music for hours.
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Gemma Andrews
I need to eat my words about Claimyr. After posting my skeptical comment above, I decided to try it anyway since I needed to talk to the IRS about my K-1 losses and capital gains question. Honestly, I was shocked. I got through to an IRS tax specialist in about 20 minutes when I had previously spent 3+ hours on multiple days trying to get through. The agent was able to confirm that my specific business structure (LLC taxed as partnership) could indeed use ordinary losses to offset capital gains, but needed to be careful about basis limitations. This information was crucial because I was about to sell some stocks with big gains thinking my business losses would completely offset them, but there were limitations I wasn't aware of. Would have had a nasty surprise next April!
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Pedro Sawyer
One important thing to remember is that different types of business entities handle losses differently. For partnerships and S-Corps, the losses flow through to your personal return via K-1. For C-Corps, they don't - the losses stay with the corporation. Also, you mentioned long-term capital gains - remember those are typically taxed at preferential rates (0%, 15%, or 20% depending on your income). Regular business losses offset income at your ordinary income tax rates, which might be higher. So while you can use the losses to offset the gains, you might be "wasting" the losses that could offset ordinary income taxed at higher rates.
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Elliott luviBorBatman
•That's a really good point I hadn't considered. So even though I can use the losses to offset the gains, it might be more beneficial to use them against ordinary income instead, since that's taxed at a higher rate? Does that mean I should potentially hold off on selling those stocks if I have enough ordinary income to offset with the business losses?
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Pedro Sawyer
•Exactly right. If you have ordinary income (like wages) that could be offset by these business losses, that would generally be more tax-efficient than using the losses against long-term capital gains. For example, if you're in the 32% tax bracket, a $10,000 business loss saves you $3,200 when offset against ordinary income, but only $1,500-$2,000 if used against long-term capital gains. If possible, you might want to delay selling those stocks until a future year when you either have less ordinary income or when your business is generating profits rather than losses. Of course, this needs to be balanced against your investment strategy - don't hold a poor investment just for tax reasons.
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Mae Bennett
Dont forget to watch out for the excess business loss limitation too! For 2025, if your business losses exceed $305,000 (married filing jointly) or $155,000 (single), the excess can't be used to offset other income. This tripped me up bad last year lol. The unused loss gets carried forward as a net operating loss (NOL), but NOLs can only offset 80% of taxable income in future years. Tax code is so frustrating sometimes!
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Beatrice Marshall
•This 👆 is super important. My accountant missed this on our 2023 return and we had to file an amendment. The rules for business losses changed a lot after 2018 and not everyone is up to speed.
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AaliyahAli
Great discussion here! One thing I'd add is to make sure you're tracking your adjusted basis in the business properly. For partnerships and S-Corps, you can only deduct losses up to your basis in the entity. Your basis includes your initial investment plus any additional capital contributions, plus your share of entity debt (for partnerships), minus any distributions you've received. If your losses exceed your basis, the excess gets suspended and carries forward until you have sufficient basis to use them. This is especially important if you've been taking distributions from the business in prior years - those reduce your basis and might limit how much loss you can currently deduct. I'd recommend having your accountant calculate your current basis before making any decisions about stock sales.
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Chloe Davis
•This is really helpful! I'm new to K-1s and business losses, so I'm trying to understand the basis calculation. When you mention "your share of entity debt" for partnerships - does that mean if our family partnership has a business loan, part of that debt counts toward increasing my basis? And if we've been taking monthly distributions to cover personal expenses, those would reduce my basis even if the business is profitable in those months? I'm realizing there's a lot more complexity here than I initially thought. Might need to sit down with our accountant before making any moves with the stock sales.
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Nora Brooks
•Yes, exactly! For partnerships, your share of partnership debt (called "partnership liabilities") does increase your basis. So if your family partnership has a $100,000 business loan and you own 25% of the partnership, that adds $25,000 to your basis. And you're right about distributions - they reduce your basis regardless of whether the business was profitable in those specific months. The distributions reduce your basis when taken, not when the income is earned. So if you've been taking regular monthly distributions over the years, those could significantly reduce your available basis for deducting losses. Definitely smart to sit down with your accountant before making stock moves! They can calculate your exact basis and help you understand how much of the K-1 losses you can actually use this year versus what might need to carry forward. This will be crucial for your tax planning strategy.
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Sophie Hernandez
Based on everything discussed here, it sounds like you have several important factors to consider before selling those stocks: 1. **Material participation**: Since you actively run the business, your K-1 losses should qualify as ordinary losses that can offset capital gains. 2. **Tax efficiency**: As Pedro mentioned, using business losses against ordinary income (taxed at higher rates) is usually more beneficial than offsetting long-term capital gains (taxed at preferential rates). 3. **Basis limitations**: Make sure you have sufficient basis in the business to actually deduct the full amount of losses this year. 4. **Excess business loss limits**: Watch out for the $305,000/$155,000 thresholds that Mae mentioned. Given the complexity here, I'd strongly recommend modeling different scenarios with your accountant before making any stock sales. You might find it's better to: - Use the business losses against your ordinary income this year - Hold the appreciated stocks for a future year when you don't have business losses - Or potentially harvest some losses from other investments instead The tax savings from strategic timing could be substantial, so it's worth taking the time to plan this properly rather than rushing into stock sales.
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Christian Bierman
•This is an excellent summary, Sophie! As someone just learning about these rules, I really appreciate how you've laid out all the key considerations in one place. The point about tax efficiency is particularly eye-opening - I never would have thought that using losses against ordinary income could be more valuable than offsetting capital gains. It seems counterintuitive at first since capital gains feel like "bigger" income, but the tax rate difference makes total sense. I'm curious about the modeling scenarios you mentioned. Are there specific worksheets or tools that accountants typically use to compare these different timing strategies? Or is it more of a manual calculation comparing the tax savings from each approach? Also, for someone in a similar situation, would you recommend getting this analysis done before the end of the tax year, or is there still time to make strategic moves in early 2025?
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