Application of Capital Loss Carryover Principle: Scenario - Significant Capital Losses in Year 1 and Significant Capital Gains in Year 2

[bobsimmons]

Here is my situation - I have significant capital losses this year ($21,000). I know that I can only claim $3000 of those losses on my taxes this year and the rest can be carried forward to subsequent years. Now, the subsequent years is where I have the confusion. Most of the literature and examples online talk about being able to use $3000 per year in the subsequent years. For example, in my case the literature would say I will be able to carry forward my losses up to 6 more years (21,000 - 3,000 = 18,000 and 3,000 per year would give me 6 more years). To simplify things, does the literature assume that there are no capital gains in the subsequent years? What happens if I have significant capital gains in the subsequent years? For example, next year if I have a capital gain of $50,000 - will I be able to use all of my remaining capital losses from the previous year (i.e, 18,000) and pay taxes only on $32,000 or do I have to deduct only $3000 and pay taxes on $47,000 and carry the remaining $15,000 losses to the subsequent years? Any input is highly appreciated. Thanks!

[ScruffyCurmudgeon]

The $3,000 limitation is specifically the opportunity to "write-off" up to $3,000 of Ordinary Income [wages/salary, interest, dividends, pension, et alii] of prior year carry-forward capital losses.  In any year that you have capital gains, the sequence is this:

1. Any short-term prior year losses are applied as a write-off first to current year short-term gains, and if still some carry-forward loss remains, applied to long-term current year gains.
2. Similarly for long-term prior year losses, against current long-term gains and then if any left, against short-term gains.
3. Separate from that, if there are still remaining after all of that writing off of losses against gains, then up to $3,000 of losses can be applied against ordinary income.
4. The remainder of loss carries forward to next year - and continues year-to-year until the capital loss is exhausted either through write-off against gains or through the write-off against ordinary income..
   

[VolvoGirl]

So basically yes, you can use up more of the loss in one year if you have gains.

[jerry2000]

The way the carryover works in subsequent years is this:

Each year, the entire remaining loss is available to offset that year's capital gains, if any. In addition, if there is loss remaining after offsetting all of that year's capital gains, then up to $3,000 of the remaining loss is used to offset ordinary income. Any loss remaining is carried over to the next year. That process continues until the loss is completely used up. You must claim the remaining loss each year, whether you have capital gains that year or not. Turbotax takes care of the calculations for you.

The rules and process are described in some detail in IRS Pub. 550, Investment Income and Expenses, at this link:

http://www.irs.gov/pub/irs-pdf/p550.pdf

You would be well advised to read the rules carefully (starts on page 68)