Do I have to use a capital loss carryforward even if I have no taxable income?

[shadow4-14-92]

My income was negative using the capital loss carry forward.  I would rather save it for a year in which I have taxable income.  Is it possible for me to do that?

[Hal_Al · Accepted solution]

The simple answer is no.  But, you must report the capital loss carry forward on your current year return. You are not allowed to postpone using it or saving it for a more advantageous time.

The actual is answer is more complex. Although you have to report it, it may not all get wasted (used). The best thing to do is prepare a tax return (even if you aren't required to file) to accurately calculate the carry over to the next year.

The tax law says you have to use a capital loss before you're allowed to use a personal exemption  If the personal exemption would completely eliminate your income, you would rather use the personal exemption first. That way, the capital loss would carry over to the next year. Instead, you're forced to use the capital loss, and there's no carryover for unused personal exemptions. Don't ask me why the law works this way: that's just the way it is. 

An example may help explain it:
You have a $12K capital loss carry forward from the previous year. Your AGI is $4000, including the $3000 loss on line 13. Meaning your income was $7000 before deducting the loss,
  $7000
-   6100 Standard deduction
=    900  Taxable income before exemptions and capital losses are deducted

  $3000 Capital loss shown on line 13
-     900 Used to reduce pre-exemption taxable income to 0
=   2100 of that $3K capital loss will be carried to 2014.  That's in addition to the $9K (12,000-3,000), so $11,100 will be carried forward. TurboTax can handle this calculation and will prepare a carry forward worksheet to show it.

Like I said, it's complicated. It's the government. 

Edit:  Starting with tax year 2018, there are no more personal exemptions.  Personal exemptions were replaced. by larger standard deductions

[maineransom]

Complicated? No. The government wants you to use up your loss carry forward against nothing instead of allowing you to carry it forward to use against a future gain. Not fair. Not right.

[lionfish]

I totally agree. This is unfair and wrong. If my taxable income in 2014 is 0 and I had $3500 of capital loss, how can I use Turbo Tax to save the entire capital loss ($3,500) for the next year?

[Hal_Al]

"If my taxable income in 2014 is 0"
How did your taxable income get to zero? Was it because you used the capital loss? You cannot force TT to " save the entire capital loss". It will correctly calculate how much of it you are allowed to "save" .

[lionfish]

My income was $645 in 2014 (from dividends). Personal exemption and standard deduction (all together $10,150) would help eliminate my taxable income to 0 (actually negative). In this case,  am I eligible for carry forward of the entire capital loss ($3,500) to the next year? Thank you!

[Hal_Al]

Yes, but it's because your  income is reduce to zero by you standard deduction ($6100), not combination of your personal exemption and standard deduction (all together $10,150)

You don't need to go thru the exercise of preparing a tax return. The entire $3500 is carried forward. But, you should prepare some documentation, such as the calculations above

[noelroy]

This was a very useful answer. But now that personal exemptions have been removed from the tax code, does the answer still apply? In other words, if there is no personal exemption to use, do I still have to use the carryover loss?

[HitEmTrue]

No, the answer does not apply for tax years 2018 and after.

[Hal_Al · Accepted solution]

The answer is still the same.  Only the personal exemptions  have been eliminated.  With the larger standard deductions, it's even more likely that low income people  will be able to carry forward the entire capital loss. 

Modifying the example above, for the current law:

You have a $12K capital loss carry forward from the previous year. Your AGI is $4000, including the $3000 loss on line 7 (2020 form 1040) . Meaning your income was $7000 before deducting the loss,
  $7000
-   $12,400 Standard deduction
=    0 Taxable income before capital losses are deducted
The entire $12,000 capital loss can be carried forward. 

[HitEmTrue]

Fair enough...I was only addressing the exemption part of the equation.

[hebroots]

This whole situation has got me very confused.  I had a large capital loss in 2015.  For a few years I was able to write-off $3000/yr loss. Also my total amount of carryover would decrease that same amount. Then for some reason the tax forms changed to where I would still get the $3000 writeoff, but the amount to be carried over would not decrease.  This has been the only reason for me to file to keep track of my carryover, I do not get a refund nor pay anything. So does this carryover ever go away?  I do not need the deduction, the whole thing is crazy. 

Just wondering if that situation of having an unfinished carryover will alert the IRS if I did not file? It does nothing but make more paperwork.

[Hal_Al]

@hebroots "Then for some reason the tax forms changed to where I would still get the $3000 write off, but the amount to be carried over would not decrease. "

It may appear that way. -$3000 is showing on line 7 of form 1040.  But because your income is so low (and no tax is calculated), the -3000 is not needed to get you to 0 tax.  So, that $3000 also carries forward.  This is explained above.  

[hebroots]

I can understand where some would want to hold on to the ability to take a $3000 writeoff but I see no scenario where that would be necessary.  I am done with investments.  So I am thinking that this year if I prepare a return with the numbers, and not even mention the carryover, but not file it (at that point it would be a "frivolous return"), it would show I neither pay tax or get a refund and have no carryover.  This could go on indefinitely otherwise.

[Hal_Al]

Yes, yours is a common situation.  The carryover is essentially loss (goes unused) for lack of other income. But the balance does continue to carry over.   The ultimate is: the entire carryover is wiped when you die.  Even on your final return, for the year of your death, your net capital loss deduction is limited to $3000. Anything in excess is simply loss.