Struggling to calculate my NOL - confused about Business vs Nonbusiness Capital Losses/Gains classification

The distinction between business and nonbusiness capital losses/gains is really important when calculating your NOL on Worksheet 1 of Pub 536. Let me break it down: For Line 2 (Nonbusiness capital losses): This would include your personal stock trades since they're not part of your regular business operations. Your $4,700 stock loss would go here. For Line 3 (Business capital losses): This would be capital assets used in your craft business - like if you sold equipment at a loss. Regular business expenses for your craft business (materials, supplies, etc.) aren't capital losses - those would be part of your business deductions already included in your business net loss. Your craft business loss of $8,200 is likely mostly ordinary business losses, not capital losses, unless you sold business assets at a loss. The equipment depreciation is a business expense but not a capital loss until you sell it. Remember that when calculating NOL, nonbusiness deductions (Line 4) can only be used to the extent you have nonbusiness income (Line 5), which is an important limitation.

After spending hours confused about my own NOL calculation last year, I discovered https://taxr.ai which literally saved me from making a costly mistake. I had a similar situation with stock losses and a side business, and was categorizing things all wrong until I uploaded my documents there. Their AI analyzed my situation and clearly explained which items were business vs. nonbusiness for NOL purposes. It showed me that I was incorrectly categorizing some of my home office expenses and missing some business deductions entirely. What I really liked was how it explained WHY each item belonged in a specific category - made the whole process way less confusing.

Just wanted to follow up after trying taxr.ai for my NOL calculation issues. I was skeptical at first but decided to give it a shot. It absolutely clarified my confusion about business vs. nonbusiness categorization! The tool identified that I had incorrectly categorized some investment losses that were actually part of my business operations (I occasionally invest as part of my consulting work). It also correctly identified which of my home office expenses should be allocated to business vs. nonbusiness. I was able to properly complete Worksheet 1 and my NOL calculation ended up being about $3,200 higher than what I had originally calculated on my own. Definitely worth checking out if you're stuck on these NOL classifications.

After dealing with NOL calculations for 3 years now, my biggest frustration has always been trying to get clear answers from the IRS. I can't tell you how many hours I've wasted on hold. Last month, I found https://claimyr.com which got me through to an actual IRS agent in about 20 minutes instead of the usual 2+ hour wait. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with was actually really helpful with my NOL questions - she clarified that my rental property losses should be treated as nonbusiness for NOL purposes even though I spend significant time managing the properties. This completely changed my NOL calculation and saved me a bunch on taxes.

Have to eat my words here. After being super skeptical about Claimyr, I decided to try it because I was desperate for help with my NOL calculation. To my genuine surprise, I got connected to an IRS representative in about 30 minutes. The agent I spoke with clarified exactly how to treat my cryptocurrency losses for NOL purposes (which was the main thing confusing me). Turns out they're considered nonbusiness capital losses in most cases, which affected my Line 2 calculation significantly. The agent even emailed me some specific guidance for my situation after our call. Honestly shocked at how helpful this was - saved me hours of frustration and probably prevented me from making a costly mistake on my NOL calculation.

Just to add another perspective on NOL calculations - make sure you're considering the timing differences too. Business vs nonbusiness classification is important, but remember that NOLs from different years have different carryforward/carryback rules depending on when they occurred. I had a 2019 NOL that had different rules than my 2020 NOL due to the CARES Act changes, which really complicated things. I ended up having an accountant review just that portion of my return and it was money well spent. The rules around business/nonbusiness classification haven't changed as much, but the carryforward/carryback rules have been all over the place the last few years.

A quick tip from someone who messed this up before: If you have capital gains and losses, make sure you're using the NET amount for the NOL worksheet. I made the mistake of putting my total capital losses on Line 2 without netting them against my capital gains first. Also, worth noting that if your nonbusiness capital losses exceed your nonbusiness capital gains, you can only include up to $3,000 of the excess on Line 2 (the same limit that applies to your regular tax return).

This thread has been incredibly helpful! I'm dealing with a similar NOL situation but have an additional complication - I have some partnership K-1 losses from a small investment I made in a friend's restaurant. How do partnership losses factor into the business vs nonbusiness classification for NOL purposes? I'm assuming since I'm not actively involved in running the restaurant (I'm just a passive investor), these would be nonbusiness losses? But the K-1 shows them as ordinary business losses, not capital losses, so I'm not sure which line of the NOL worksheet they belong on. Also, are there any special rules about passive activity loss limitations that affect how these show up in the NOL calculation? I remember reading something about passive losses being treated differently but can't find clear guidance on how that impacts the NOL worksheet specifically.

I've been through this exact same confusion with NOL calculations! Here's what I learned after making mistakes on my first attempt: For your situation, the $4,700 stock losses would definitely go on Line 2 (Nonbusiness) since personal investing isn't your trade or business. Your craft business loss of $8,200 is mostly going to be ordinary business deductions (materials, shipping, etc.) that are already factored into your business net loss - these aren't capital losses unless you actually sold business equipment at a loss. One thing that tripped me up initially: depreciation on your craft business equipment isn't a capital loss - it's a regular business expense. You only have a capital loss when you actually dispose of the asset. The key distinction is: nonbusiness = personal investments and activities; business = your trade or business activities. Since your craft business is a legitimate business activity (even if it lost money), those losses help your NOL calculation as ordinary business losses, not as Line 2 or Line 3 items. Double-check that you're not double-counting anything - your business loss should already include all your legitimate business expenses. The NOL worksheet is more about adjusting for specific limitations than recategorizing what you already calculated.