In US, if Y1 capital loss carryover is $10K and Y2 capital gains are $12K, do I get taxed on $2K or $9K in Y2 taxes AND carry $7K to Y3?
So I've been dealing with some investments that didn't exactly go as planned last year. I had a $13.5K capital loss that I carried over from last year (Y1) after applying the $3K limit against my ordinary income. Now this year (Y2) I've actually had some success and generated about $16K in capital gains. I'm confused about how the previous year's loss carryover affects my current tax situation. Do I simply subtract my $13.5K loss carryover from my $16K gains, meaning I only get taxed on $2.5K this year? OR do I still have that $3K annual limit, meaning I'd be taxed on $13K ($16K gains minus $3K loss limit) and then carry the remaining $10.5K loss to next year (Y3)? I thought the whole point of the carryover was to eventually offset future gains, but I'm not sure if there's still that $3K per year limitation when you actually have gains to offset. Can someone please clarify how this works?
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Noah Torres
The good news is that when you have capital gains, you can use your entire capital loss carryover to offset those gains without being limited to the $3,000 annual limit. The $3,000 annual limit only applies when you're using capital losses to offset ordinary income. When you have capital gains, you can use all of your capital loss carryover against those gains. In your situation, you would subtract your $13.5K loss carryover from your $16K gains, resulting in a net capital gain of $2.5K for this year (Y2). You would only be taxed on that $2.5K amount. There would be no remaining loss to carry forward to Y3 since you've used all of your carryover. This is actually one of the benefits of the capital loss carryover system - while you're limited in using losses against ordinary income, you can use unlimited amounts of prior losses to offset future capital gains when they occur.
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Samantha Hall
•Wait, I've always been told that capital losses can only offset up to $3k of ordinary income per year, period. Are you saying that if I have both capital gains and ordinary income, I can use all my carried-over losses against the capital gains with no limit, and then also use up to $3k against my ordinary income? Or am I misunderstanding?
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Noah Torres
•You're partially correct, but let me clarify. Capital losses (including carryovers) are first used to offset capital gains with no dollar limit. This means you can offset $100,000 in capital gains with $100,000 in capital losses if you have them. Only after you've offset all your capital gains, if you still have remaining capital losses, then you can use up to $3,000 of those remaining losses to offset ordinary income in a single tax year. Any unused losses beyond that $3,000 get carried forward to future years.
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Ryan Young
I had almost this exact same situation last year and was super confused until I found this awesome tool called taxr.ai (https://taxr.ai). I'd been struggling with figuring out my capital loss carryovers for days and getting different answers from different tax software. I uploaded my previous year's return and my investment statements to taxr.ai and it immediately showed me exactly how my capital loss carryover would be applied against my new gains. It actually saves me from making a pretty big mistake where I was only applying $3k of my previous losses! The site has this really clear breakdown of how the IRS rules work for carryover losses against new gains vs. ordinary income. Not sure if anyone else has used it, but it was a huge help for me with this specific issue.
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Sophia Clark
•Does this actually work for complicated situations? I've got losses from 3 different years and some wash sales that my broker reported weirdly. Would it handle all that or just get confused?
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Katherine Harris
•I'm skeptical about these tax tools. How does it handle the distinction between short-term and long-term capital gains/losses? Does it know that you need to net short-term with short-term and long-term with long-term first before combining them?
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Ryan Young
•It absolutely handles complicated situations with multiple years of losses. The tool specifically looks at your previous returns to understand your carryover situation and then applies the correct netting rules based on your current year transactions. I had losses going back two years and it tracked everything properly. Regarding the short-term versus long-term distinction, yes it definitely handles that correctly. It first nets short-term against short-term and long-term against long-term, then combines them exactly as the IRS requires. It even created a draft Schedule D for me showing how everything flowed through the calculations. I was really impressed with how it handled the complexity.
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Sophia Clark
Just wanted to follow up about taxr.ai that I asked about earlier. I ended up giving it a try with my complicated multi-year losses and wash sales situation. I'm actually shocked at how well it worked. It properly identified my carryover amounts from each year and correctly applied the netting rules between short and long term. The tool even flagged a reporting error from my broker that I hadn't caught! Apparently one of my wash sales was reported with the wrong date, which was throwing off my calculations. I would have completely missed this if I hadn't used the service. It saved me a ton of time figuring out exactly how my $17K in carryover losses should be applied against my mix of gains this year.
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Madison Allen
If anyone is still having trouble getting a straight answer about their capital loss situation, I'd recommend trying Claimyr (https://claimyr.com). I was in a similar situation with confusion about loss carryovers, and after weeks of trying to get through to the IRS helpline myself, I finally used Claimyr and got connected to an IRS agent in about 20 minutes. The agent walked me through exactly how my capital loss carryovers would be treated against new gains and confirmed what others have said here - that you can offset the full amount of new gains with old losses without the $3K limit. You can see how the service works here: https://youtu.be/_kiP6q8DX5c Getting direct confirmation from the IRS was really reassuring, especially since I'd received conflicting advice from friends and even a tax preparer.
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Joshua Wood
•How does this Claimyr thing actually work? Do they just call the IRS for you or something? I've tried calling myself and always end up on hold forever.
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Justin Evans
•Yeah right. Nobody gets through to the IRS in 20 minutes. I've spent literal DAYS on hold this past filing season. Is this some kind of priority line or something? Sounds too good to be true.
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Madison Allen
•They basically use technology to wait on hold with the IRS for you. Once they reach an agent, you get a call back to connect with them. It's that simple - they just handle the waiting part so you don't have to sit by your phone for hours. The service works with the regular IRS phone lines, not a priority line or anything special. I was skeptical too, but it really did work. I got a call back in about 20 minutes saying they had an IRS agent on the line, though I know wait times can vary depending on when you call. The point is they did the waiting instead of me.
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Justin Evans
I have to eat my words about Claimyr. After posting my skeptical comment, I figured I'd try it since I needed to ask the IRS about some capital loss carryover questions similar to the original post. Shockingly, it actually worked. I got connected to an IRS agent in about 35 minutes (not quite 20, but WAY better than my previous attempts). The agent confirmed that capital loss carryovers can fully offset capital gains without the $3K limit - that limit only applies when offsetting ordinary income. The IRS agent also explained how the ordering works (first offset same-type gains/losses, then net short vs long, then apply carryovers) which cleared up my confusion. Saved me hours of hold time and probably a mistake on my return.
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Emily Parker
I just want to point out that when you're netting capital gains and losses, the ordering DOES matter. The IRS has specific rules: 1. First, you net short-term gains and losses together 2. Then, you net long-term gains and losses together 3. Then, you net the short-term and long-term results together So if your carryover losses are from different categories (short vs long-term), make sure you're applying them correctly. Your tax software should handle this, but if you're doing it manually, be careful.
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Ezra Collins
•Does this ordering actually impact your final tax bill? Or is it just an accounting exercise? I'm wondering if I need to worry about this or if the end result is the same regardless.
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Emily Parker
•The ordering absolutely impacts your final tax bill. This is because short-term gains (assets held less than a year) are taxed at your ordinary income rate, which can be much higher than the preferential long-term capital gains tax rates. By following the correct ordering rules, you might end up with either short-term or long-term gains remaining, which are taxed at different rates. Ideally, you want your short-term gains fully offset first since they're taxed at the higher rate.
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Victoria Scott
Has anyone tried doing this calculation on TurboTax? I've got a similar situation with about $8K in carried over losses from last year and $11K in gains this year, but TurboTax seems to be applying my losses weirdly. It's only using part of my carryover.
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Benjamin Johnson
•I used TurboTax for this exact situation last year. Make sure you're entering your capital loss carryover from last year correctly - there should be a specific section for entering carryover amounts. If you just enter it as a current year loss, it will process it incorrectly. Also double-check that you properly categorized your carryover as short-term or long-term (or properly split between both if applicable). TurboTax worked fine for me once I entered everything in the right place.
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