UTMA Custodial Account capital loss carryover

[garyhagnauer]

I manage a UTMA (Uniform Transfer to Minor’s Act) Custodial Account for my grandson who is 7 years old.  During 2016 he had unearned income of $1,920 and a significant long-term capital loss (-$9,500).  Since he never had unearned income exceeding $2,100 or capital gains/losses to report for prior years, his income was not reported with his parent’s tax return using Form 8814, or separately as a 1040 with Form 8615.  

My question is whether it is necessary to file a 1040 with Form 8615 for the tax year 2016 to be able to carryover his capital loss from 2016 to offset potential capital gains in future years?  

Entering his investment data to generate a 1040 for 2016 using TurboTax, his adjusted gross income becomes -$1,079 (line 37) with total tax $0.00 (line 63) and a long-term capital loss carryforward of $8,676 to 2017 (line 13 on the Capital Loss Carryforward Worksheet).  If detailed records are maintained, is it necessary to file his taxes for 2016?  Can that wait until he has income exceeding the exclusion limit?

[RichardK · Accepted solution]

No, Form 8615 is not filed if unearned income is less than $2,100.

Yes, it is necessary to file a 2016 tax return to preserve the capital loss carryover.

No, you can't wait until income exceed the 2016 capital loss to report the loss.

[Gavin53]

It has been more than 3 years since our UGMA losses. How do I recover them? I may have carried it forward in my account, can I transfer it back to my son?

[GeorgeM777]

You should be able to carryover the losses year after year until there are no more carryover losses.  A capital loss from selling assets in a custodial account cannot be reported on the parents’ tax return. There’s a rule that allows parents to report the income of a child on their tax return in certain circumstances, but this option is available only when all the child’s income is from interest and dividends. If your child has capital gains or losses, all the child’s income (including interest and dividends) must be reported on a separate tax return for the child.

You can’t get around this rule by transferring the shares from the UGMA account to your own account before making a sale. Even if the transfer is allowed, you won’t be permitted to claim the loss when you sell the shares.

@Gavin53