How to claim unreported capital losses from previous years on current tax return?

15 Wait, so I have to file returns for those years even if I had no income? I thought you only needed to file if you made over a certain amount. Will I get penalized for filing these past returns so late?

8 You're right that there are income thresholds that determine if you're required to file. If you were under those thresholds, you weren't legally required to file - but in this case, filing is still necessary to document and establish your capital losses so you can carry them forward. You generally won't face penalties for filing late returns that don't show a tax due. The IRS is primarily concerned with collecting taxes owed, so if these returns don't show any tax liability (and especially if they show losses), penalties are unlikely. The bigger issue is that without filing those returns, you simply can't claim the benefit of carrying those losses forward to current and future years.

18 How does this service handle different types of investments? I've got some stock losses but also lost money on some options contracts. Does the system understand the different treatment of those?

22 I'm a little skeptical about uploading financial statements to any online service. How secure is this? And does it actually prepare the amended returns or just tell you what to put on them?

12 It handles different investment types really well. The system recognized my stock trades, crypto sales, and even some more complex investments. For options contracts, it properly calculates the loss based on the contract specifications and applies the correct tax treatment. The security is actually what convinced me to use it - they use bank-level encryption and don't store your documents after processing. It doesn't file the returns for you, but it generates detailed reports showing exactly what forms you need and what numbers go where. I just took that info and used it with my regular tax software to file the amended returns.

17 How exactly does this work? Does it just dial the number for you or what? I don't get how any service could get you through the IRS phone system faster than calling directly.

22 Yeah right. Sounds like snake oil to me. The IRS phone system is designed to be impenetrable - no service could possibly get you through faster. I've tried calling dozens of times about my amended return and it's always the same "due to high call volume" message before disconnecting.

5 It's not just dialing for you - the system actually interfaces with the IRS phone system on your behalf, navigating through all the prompts and waiting in the queue instead of you. When an actual IRS agent becomes available, Claimyr calls you and connects you directly to that agent. The reason it works is because their system can handle staying on hold for hours while you go about your day. They've basically reverse-engineered the IRS phone system to understand the best times to call and which prompts will get you to the right department. It's not magic - just efficient technology handling the most tedious part of contacting the IRS.

15 What kind of documentation should I save exactly? I have confirmation emails when I made the trades, plus year-end statements from my brokerage. Is that enough or do I need something else?

7 The year-end statements from your brokerage are a good start, but also keep the individual trade confirmations if possible. If your brokerage provides a gain/loss report for the tax year, definitely save that as well. It's also helpful to keep a simple spreadsheet tracking each position, when you bought it, how much you paid (including any fees), when you sold it, and the sale price. This makes it much easier to verify the numbers on your tax forms and spot any discrepancies. In my case, having this detailed information available immediately when the IRS asked questions made the process go much smoother and faster.

3 I did my amended 2020 and 2021 returns last year using TurboTax. You definitely have to mail paper forms for 2020 (Form 1040-X), but for 2021 and newer you can e-file amendments through TurboTax. Just make sure you have all your original filing information handy because you'll need to enter both the original amounts and the corrected amounts.

This is really helpful advice about the substantial understatement rules - I hadn't thought about that aspect. My losses are definitely over $5,000, so including an explanation letter makes a lot of sense. Do you know if there's a specific format the IRS prefers for these explanation letters, or is it just a simple statement explaining the situation? Also, should I attach the same letter to both years' amended returns or write separate explanations for each year?

For the explanation letter format, keep it simple and professional. The IRS doesn't have a specific template, but I'd suggest something like: "Dear IRS, I am filing this amended return to report capital losses that occurred in [year]. At the time, I had no filing requirement due to income below the threshold, but I am now establishing these losses to carry forward to future tax years as permitted under IRC Section 1212." I'd write separate letters for each year since they're technically different tax periods, even though the explanation is similar. Just make sure to reference the specific year and loss amounts in each letter. Keep copies of everything you send - if the IRS has questions later, having your original explanation readily available will save you time.

That's a really important point about timing that I hadn't considered. The processing delays for amended returns could definitely create complications if you're trying to claim carry-forwards before the IRS has officially accepted the establishing returns. I'm curious though - if you do file your current return with the carry-forward losses while the amended returns are still processing, and then the IRS questions it, can you provide copies of the filed (but not yet processed) amended returns as documentation? Or would they require the returns to be fully processed and accepted first? It seems like such a catch-22 situation where you might miss filing deadlines waiting for processing, but filing without waiting could trigger unnecessary scrutiny.

You raise an excellent point about the catch-22 situation. From my experience dealing with similar timing issues, the IRS generally wants to see that the establishing returns have been officially processed before they'll accept carry-forward claims without question. However, you can provide copies of your filed amended returns as supporting documentation if questioned - just make sure to include certified mail receipts or delivery confirmations showing they were actually submitted. A safer approach might be to file your 2024 return on time but without claiming the carry-forwards initially, then amend it once your 2021-2022 returns are processed. Yes, it's more paperwork, but it eliminates the risk of having your current return held up or flagged for review. The carry-forward losses don't disappear - they'll still be available whenever you're ready to properly claim them. Sometimes taking the conservative route saves headaches later, especially when dealing with the IRS's current processing backlogs.

That's a brilliant point about the NIIT interaction that I completely overlooked! I'm actually expecting some significant capital gains in the next few years from stock options that will vest, so those carry-forward losses could be incredibly valuable for offsetting both regular capital gains tax AND the 3.8% NIIT. Quick question - when calculating whether the losses can offset NIIT, do they reduce your modified AGI directly, or do they just offset the investment income component? I want to make sure I understand the mechanics correctly since this could potentially save me way more than just the $3,000/year ordinary income benefit. This definitely tips the scale toward filing those amended returns sooner rather than later.

Great question about the NIIT mechanics! Capital losses reduce your net investment income directly, not your modified AGI. So if you have $10,000 in capital gains and $8,000 in carry-forward capital losses, your net investment income for NIIT purposes would only be $2,000. This is actually more beneficial than reducing MAGI because it directly reduces the income subject to the 3.8% tax. The losses first offset capital gains dollar-for-dollar, then up to $3,000 can offset ordinary income (which does reduce your MAGI). Any remaining losses carry forward to future years. So with substantial stock option gains coming, those carry-forward losses could indeed save you significant money on both regular capital gains tax (0%, 15%, or 20% depending on your income) plus the 3.8% NIIT on the investment income portion. Definitely worth establishing those losses now given your future gains potential!