How do capital losses carryover work for short-term vs long-term investments in 2025?

The IRS has specific rules about how capital losses are applied, and unfortunately, you don't get to choose which type gets used first. Here's how it works: First, short-term losses are applied against short-term gains, and long-term losses against long-term gains. If you have a net loss in one category and a net gain in the other, the net loss offsets the net gain. After that process, if you still have an overall net capital loss, you can deduct up to $3,000 against your ordinary income ($1,500 if married filing separately). For your situation with $4,800 in short-term losses and $7,200 in long-term losses, with no gains, the full $3,000 deduction against ordinary income happens and the remaining $9,000 carries forward to future tax years. The carryover maintains its original character (short-term or long-term), which matters because in future years you'd use these carryover losses following the same rules. Your tax software should handle the calculations correctly, but it's always good to understand the process yourself.

I went through the exact same issue last tax season and ended up using https://taxr.ai to help me get clarity. I had this weird mix of some crypto losses (short term) and some dividend stocks that tanked (long term) and couldn't figure out how to properly track the carryover. Their system analyzed my trading history and tax forms, then explained which losses would carry forward and with what character (short vs long term). It actually found some wash sales I hadn't accounted for that would have messed up my calculations completely. The tool also showed me how to properly document everything on my Schedule D and the capital loss carryover worksheet.

I have to admit I was wrong about taxr.ai. After our conversation here, I decided to give it a try because my capital loss situation was getting even more complicated this year. I uploaded my trading records from the last two years, including some inherited stocks I received after my uncle passed. The system immediately identified which losses were short vs long term, and created a carryover strategy that maximized my tax benefits over the next few years. It even produced a detailed report explaining why certain losses should be applied in specific tax years based on my expected income. The capital loss carryover worksheet it generated made filing so much easier than the confusion I went through last year.

If you're still struggling with the IRS after filing and need clarification on how they processed your capital loss carryover, I highly recommend using Claimyr (https://claimyr.com). I had filed with significant losses similar to yours, but the IRS processed my return incorrectly and didn't properly apply my carryover from the previous year. After weeks of trying to reach someone at the IRS (literally 20+ calls with hours on hold), I found this service. They got me connected to an actual IRS agent in about 20 minutes who was able to see that my carryover hadn't been properly recorded. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent was able to correct the issue while I was on the phone, which saved me from having to file an amended return.

I need to publicly eat my words. After posting my skeptical comment, I was desperate enough to try Claimyr anyway because the IRS had completely messed up my capital loss carryover from 2023. My short-term carryover was showing up as long-term on my transcript. I was connected to an IRS agent in less than 30 minutes. The agent actually thanked me for my patience (ironic since I'd been trying to reach them for months). She was able to see the coding error on my account and corrected how my capital losses were characterized. This fixed both my 2023 and 2024 returns since the carryover amounts weren't flowing correctly. For anyone dealing with capital loss carryover issues, don't waste months like I did. Getting a human on the phone makes all the difference.

Don't forget that when you have capital loss carryovers, you need to keep track of them yourself! The IRS doesn't send you a reminder of your available carryover amounts. I learned this the hard way when I forgot about a $4,300 carryover from 2022 and nearly missed claiming it on my 2023 return. Make sure you keep copies of your Schedule D and the Capital Loss Carryover Worksheet from each year. I now keep a spreadsheet that tracks my short-term and long-term carryover amounts separately to make sure I don't lose track.

Has anyone noticed that TurboTax and H&R Block handle capital loss carryovers differently? Last year I started my return in both just to compare, and they had different suggestions for how to allocate between short and long term losses.

Just want to add a practical tip for everyone dealing with capital loss carryovers - make sure you're also considering the wash sale rule when calculating your losses. I made this mistake in 2023 where I sold some stocks at a loss in December, then bought them back in January thinking I was being smart about tax loss harvesting. The IRS disallowed those losses because of the 30-day wash sale rule, which completely threw off my carryover calculations. Had to file an amended return once I realized the error. Now I use a 35-day rule to be safe and track all my transactions in a spreadsheet to avoid buying back the same or "substantially identical" securities too quickly. Your $12,000 in losses sounds straightforward since you mentioned giving up on the investments entirely, but just wanted to mention this in case anyone else reading has been doing any tax loss harvesting strategies.

Great breakdown of the capital loss rules! One thing that might help visualize this for your $12,000 total loss situation: think of it like you have two separate buckets - $4,800 in short-term losses and $7,200 in long-term losses. Since you don't have any capital gains to offset, your total $12,000 loss will be applied as follows: - $3,000 deducted against your 2024 ordinary income - $9,000 carries forward to 2025 (maintaining the same character: $1,800 short-term and $7,200 long-term) The key thing to remember is that when you use that $3,000 deduction against ordinary income, the IRS applies short-term losses first. So of your $3,000 deduction, $3,000 comes from your short-term losses, leaving you with $1,800 in short-term losses ($4,800 - $3,000) and the full $7,200 in long-term losses to carry forward. This character preservation matters because in future years, if you have capital gains, short-term carryover losses can offset short-term gains (taxed at ordinary rates) while long-term carryover losses offset long-term gains (taxed at preferential rates). Your H&R Block software should handle all these calculations correctly, but it's good that you're double-checking the process!

One additional consideration for your situation - since you mentioned this was a "rough year" with your investments, you might want to think about timing any future capital gains to optimize your tax situation over the next few years. With $9,000 in carryover losses ($1,800 short-term and $7,200 long-term after the 2024 deduction), you have some flexibility in future years. If you're planning to take profits on any investments, consider the character of those gains. Long-term gains are taxed more favorably, but you have more long-term losses to offset them. Also, don't forget that capital loss carryovers never expire - they continue indefinitely until used up. So even if you don't have gains in 2025, you can still use up to $3,000 per year against ordinary income until the full $9,000 is exhausted. At that rate, it would take about 3 more years to fully utilize your carryover losses if you don't have any offsetting gains. Keep good records of your carryover amounts each year, as the IRS doesn't track this for you. Your 2024 tax return should show the carryover calculation, and you'll need those numbers for future returns.

The timing within the tax year doesn't actually matter for optimization - the IRS rules automatically handle the offsetting in the most tax-efficient way regardless of when during the year you realize the gains. Here's how it works: All your capital gains and losses for the year (including carryovers) get netted together on Schedule D using the prescribed IRS methodology. Short-term gains are offset by short-term losses (including short-term carryovers), and long-term gains are offset by long-term losses (including long-term carryovers). If you end up with a net gain in one category and a net loss in the other, they offset each other. So in your example with $2,000 long-term gains and $1,000 short-term gains, plus your carryovers ($1,800 short-term losses and $7,200 long-term losses), here's what happens: - Short-term: $1,000 gains - $1,800 carryover losses = $800 net short-term loss - Long-term: $2,000 gains - $7,200 carryover losses = $5,200 net long-term loss - Total: $800 + $5,200 = $6,000 net capital loss, so you'd get another $3,000 deduction against ordinary income The key insight is that you don't need to time your sales strategically within the year - the tax code does the optimization automatically. Your main strategic decision is simply whether to realize gains or losses in a given tax year based on your overall financial situation.