How do Capital Losses vs Ordinary Losses work with deductions? Can business losses offset investment gains?

These are good questions about an often confusing area of tax law. Let me help clarify: Ordinary business losses can generally offset all types of income, including capital gains. There's no specific limit like the $3,000 capital loss limitation against ordinary income. So if your LLC or sole proprietorship has a $13k loss, you can use that to offset capital gains as well as your W2 income. Regarding order of operations, business losses on Schedule C will first reduce your total income on your 1040, which includes all sources (W2, capital gains, etc.). There's no mandated sequence - the loss reduces your overall taxable income. For carrying losses forward: Yes, if your business losses exceed your total income in a given year, the excess becomes a Net Operating Loss (NOL). Under current rules, you can carry these forward indefinitely. However, there are some limitations on how much you can use each year. For the S-corp question - if you personally have NOLs carried forward, you could use them against your share of S-corp income that flows through to your personal return. But remember, the S-corp itself is just a pass-through entity.

After dealing with a similar situation last year, I found this amazing tool called taxr.ai that completely simplified this exact problem for me. I was trying to figure out how my business losses could offset different types of income, and I was getting conflicting advice from different sources. I uploaded my tax documents to https://taxr.ai and it analyzed everything and clearly explained how my business losses could be applied to different income types and what I could carry forward. What I really liked is that it showed me exactly how the losses flow through my tax return and even identified some deductions related to my business that I had missed. It saved me a ton of stress trying to interpret all the tax rules.

Just wanted to update after trying taxr.ai that someone recommended above. I was really skeptical because my tax situation with both business losses and investment income is complicated, but it actually worked really well. The system showed me that I could offset all my capital gains with my business losses (which I didn't realize), and it saved me from making a big mistake with carrying losses forward. I was planning to amend last year's return incorrectly, but the analysis showed the right way to apply everything on this year's taxes instead. It also created a multi-year tax plan showing how to optimize when I sell some investments based on my business's projected performance. Definitely worth checking out if you're dealing with this capital/ordinary loss confusion.

OP, I had EXACTLY your situation last year with a failing startup and some stock sales. I spent WEEKS trying to get someone at the IRS to answer these questions. Called like 20+ times, always disconnected or 2+ hour wait times. Finally found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that business losses can offset capital gains without limitation, but they also explained some business loss limitations that kicked in for my situation that my accountant didn't know about (Section 461(l) limitation). Totally worth the call because the agent walked me through exactly how to report everything correctly.

Okay I have to eat my words about Claimyr. After posting my skeptical comment, I decided to try it myself since I've been trying to reach the IRS about a similar business loss question for months. I was 100% convinced it would be a waste of money, but I got connected to an IRS agent in about 20 minutes. The agent confirmed everything about how business losses can offset capital gains and explained the business loss limitations that might apply to my situation. The best part was getting an official answer about carrying losses forward between different business structures - I was planning to convert my LLC to an S-corp this year and was worried about losing my accumulated losses. The agent explained exactly how to handle it on my return. I never write reviews for services but had to come back and correct myself. Sorry for being so negative before!

One thing no one has mentioned yet is the At-Risk Rules and Passive Activity Loss limitations. These can limit your ability to deduct business losses regardless of whether they're from an LLC, sole prop, or S-corp. If your business is considered a passive activity (meaning you don't materially participate), you can only use those losses to offset passive income, not your W2 or active business income. This tripped me up a few years ago. Also, be careful with S-corps. The losses that flow through are limited by your basis in the S-corp. If you don't have enough basis, the losses get suspended until you increase your basis.

Not to complicate things more, but the Tax Cuts and Jobs Act added a limitation on excess business losses for non-corporate taxpayers (Section 461(l)). For 2023, this limits business losses to $289,000 for single filers ($578,000 for joint filers). Any excess gets carried forward. So if your business losses are huge, you might hit this limitation before you can offset all your capital gains. Just something to keep in mind if you're dealing with large numbers.

Great question about capital vs ordinary losses! I went through this exact situation when I started my consulting business. One key point that might help clarify things: ordinary business losses from Schedule C (sole prop) or pass-through entities like LLCs are much more flexible than capital losses. They can offset ANY type of income - W2 wages, capital gains, interest, dividends, etc. - without the $3,000 annual limitation that applies to capital losses. So yes, your $13k LLC loss can absolutely offset capital gains from your investments, and there's no specific order required. The loss just reduces your total taxable income on your 1040. For your deferral question - if your business losses exceed all your income in a year, the excess becomes a Net Operating Loss (NOL) that you can carry forward indefinitely under current rules. However, there are annual limitations on how much NOL you can use each year (generally 80% of taxable income). One thing to watch out for: make sure you understand the "material participation" rules. If the IRS considers your business activity "passive" (meaning you don't actively manage it), then those losses can only offset passive income, not your W2 or capital gains. The interaction between different loss types can get complex, so definitely consider consulting a tax professional for your specific situation!