The short answer is, "No," you generally can't use capital gains to offset ordinary losses from Schedule K-1 when calculating NIIT on Form 8960.
The reversal on Line 4b is typically due to the Passive Activity rules. If you didn't materially participate, the activity is considered passive. If the loss wasn't from a passive activity, the loss would be excluded from NIIT entirely.
The IRS rules are that capital losses can offset capital gains in the NIIT calculations. And ordinary losses cannot offset capital gains.
Note on "Material Participation": If you materially participate in the S-Corp, the $5,000 ordinary loss is excluded from NIIT because it’s "active" income. Conversely, the $10,000 capital gain (Box 7) is usually considered investment income regardless of participation, unless that gain was generated by the sale of operational assets used in an active trade or business (which would require a Section 1411 adjustment on Line 5c).
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