Can Unreported Capital Loss from 2018 Carryover to 2021 Tax Return?

[GreyGrey]

Bit of an interesting scenario here: capital loss from 2018 was unreported because I was a dependant and didn't think I had to report (never received notifications from IRS, made an online account, and didn't see any notices there either so I hope I'm safe). Also because I was ignorant about dealing with finances.

1. Wondering if I could offset this year's gains using those losses.

2. Should I be concerned about not reporting in 2018 and follow up somehow?

Thank you.

[Anonymous]

since you did not file previous returns, you can expect a notice from the IRS if a capital loss carryover starts showing up on the 2020 return.  you need to complete the 2018 and 2019 returns.   you'll need desktop software or you could get the forms from the IRS to manually prepare them.  the issue is not only that the capital losses were not reported but what about dividends and other income that could use up some of those losses. without proper preparation of 18 and 19, you'll have no way of knowing what the correct CLCO to 2020 is (filed in 2021)

https://www.irs.gov/forms-pubs/prior-year

[rjs]

You can't skip years. A capital loss carryover has to be carried over from year to year until it's used up. In order to use the loss at all, you have to file a 2018 tax return reporting it, even if you have no other reason to file. If the loss isn't used up in 2018, you have to carry it over to 2019, then to 2020. If you filed a 2019 tax return you will have to amend it to include the capital loss carryover. Then you will be able to enter the information from your 2019 tax return in TurboTax for 2020, so it can calculate the amount that is carried over to 2020, if any.

For all years, when TurboTax asks if you know the carryover amounts, do not answer Yes. Select the option that says you need help figuring out the carryover amounts.

You don't have to wait for your 2018 and 2019 original or amended returns to be processed by the IRS before you file your 2020 tax return, but you need the information from the recalculated 2019 tax return in order to correctly calculate the capital loss carryover to 2020.

And by the way, being a dependent does not mean that you don't have to file a tax return.

[GreyGrey]

@rjs @Anonymous Gotcha. I should've also mentioned that 2018-2020 I was a full-time student making no other income and also pulled the remaining money out. Would it be simpler if I just leave 2018 losses alone and start off fresh? In the long run, I'm not going to lose sleep over the losses anyway.

[Critter-3]

If your income was below the filing requirement then that is why you have not gotten an IRS letter yet ... but until you review all the returns you cannot make an informed decision.  

[rjs]

@GreyGrey 

The filing requirements for a dependent are different from someone who is not a dependent. You really need to sit down and figure out whether you are required to file for 2018, 2019, and 2020. You can use the online tool at the following link on the IRS web site to figure that out for 2018 and 2019. You'll make the determination for 2020 after the year ends.

Do I Need to File a Tax Return?

You can always file a tax return, even if you are not required to file. There are a number of reasons that you might want to do that. One possible reason is to carry over a capital loss. As stated earlier, in order to carry over the loss you have to file for the year the loss occurred and every subsequent year until the loss is used up.

You said you have some capital gains in 2020, so you most likely do have to file for 2020. You should probably file even if you technically don't have to. The only change in the filing requirements between 2019 and 2020 is some small inflation adjustments. You could get a pretty good idea of whether you have to file by putting your 2020 information into the IRS tool and selecting 2019 as the year if they have not yet updated it for 2020.

It's not clear whether the IRS knows that you had losses in 2018. It depends on whether the basis of the investments that you sold was reported to the IRS. The Form 1099-B or equivalent statement from the brokerage or mutual fund tells you whether the basis was reported. If the basis was not reported, the IRS sees only the proceeds of the sale, but not what you originally paid for the investments. Without the basis, it looks to the IRS like the proceeds are all taxable income, and they will eventually come after you to pay tax on the full amount of the sales.

When you haven't filed a tax return, there is no statute of limitations for that year. The IRS can look back as many years as they want to, and come after you many years later. (Another of the reasons to file when not required to is to start the clock running on the statute of limitations.) If it turns out that you were required to file, and you owe tax, you will also be hit with penalties and interest. The sooner you file the better.

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@GreyGrey wrote:

Would it be simpler if I just leave 2018 losses alone and start off fresh? In the long run, I'm not going to lose sleep over the losses anyway.

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It certainly would be simpler to forget about your 2018 losses, provided that you are not required to file for 2018. You could do that if you feel that the losses are not enough to "lose sleep over." You haven't said how much the losses are, or how much income you have in 2020. But you started off asking whether you could use the earlier losses to offset this year's gains, so that suggests that it would make a difference to you.

[Hal_Al]

Q. Can Unreported Capital Loss from 2018 Carryover to 2020 Tax Return?

A. Yes, but the amount must be reduced by  the amount of loss that should have been claimed on your 2018 and 2019 returns, even if you were not required to file returns for those years.

The best way to determine what the amount of the reduction was is  to actually prepare 2018 and 2019 returns, even if you don't actually file them.

Lacking that,  a simple rule is to just reduce the amount by $3000 per year (the maximum allowed capital loss deduction).   But, a student who has no other income most likely was allowed to carry the full amount forward, each year.  The rule is: if your standard (or itemized) deduction is greater than your AGI, without the capital loss, then all capital loss is carried forward. 

Note: student-dependents do not get a full $12.200 standard deduction. A dependent's standard deduction is $1100 or his earned income + $350.

"also pulled the remaining money out"  indicates you may have sold investments, realizing additional losses or gains that should be combined with the loss carry forward on calculating the next year carry forward.