If a trust distributes all income and has a capital loss, it is forced to lose $3000 of the loss. The k-1 for the beneficiary adds the $3000 as taxable . How do I fix?

[Anonymous_]

You do not "fix" the scenario you described.

Capital gains and losses are netted at the trust level and then, in some instances, net gains are passed through to the beneficiaries (assuming the trustee has the authority and/or discretion to do so). 

In the event losses exceed gains, they are carried forward to following years until they are absorbed by gains or until the trust terminates.

[lasleyma]

The software forces you to take the $3000 of the loss at the trust level which reduces ordinary income in the trust. However, all income has been passed to the beneficiary so the deduction for the distribution takes ordinary income to zero. So the trust ends up with a -3100 loss and no tax. Checking the K-1 the beneficiary does not get a reduxed ordinary income but pay tax on the amount before the reduction. So the $3000 loss is wasted in the trust. I it was not claimed, the truat tax would still be zero. This does not seem right!

[Anonymous_ · Accepted solution]

Check the Carryover Worksheet. It should show the loss being carried forward to next year.

[lasleyma]

It does appear to carryforward the full amount

[jjkeim]

What happens to the carry over capital loss when the trust terminates?

[Anonymous_]

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@jjkeim wrote:

What happens to the carry over capital loss when the trust terminates?

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It is distributed to the beneficiary(ies) as a final year deduction on the K-1(s).