Why Didn't My Capital Losses Reduce My Tax Owed?

[Tjones8226]

I had investment losses of $30,000 this year (Ouch). But, when I enter the information (importing it directly from my E-Trade account), the Capital Losses do not reduce my taxes owed by even a penny! Nothing! I am self-employed (for the last 3 years) and make my quarterly estimated tax payments, but always have about $2,000 or so left to pay when I file my taxes. I realize that you can only deduct $3,000 of investment losses a year, and the rest is a Capital Loss Carryover. But, my $30,000 of loss means I have 10 years of a worthless $3,000 deduction?? That can't be right.  I am using the Turbo Tax Home & Business 2022 software. Please help. Thank you.

[tagteam]

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@Tjones8226 wrote:

.....my $30,000 of loss means I have 10 years of a worthless $3,000 deduction?? That can't be right. 

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Yes, you have that right. However, you can use those carryforward losses to offset future capital gains (as well as up to $3,000 to use as an offset to all other types of income). 

[Vanessa A · Accepted solution]

Your capital losses will offset ordinary income and decrease your total income.  

However, if you are self-employed, you have 2 different types of taxes on that income.  One is the regular ordinary tax and the other is Self-Employment taxes which is 15.3% of your net self-employment income.  Your self-employment taxes are only reduced by your business expenses and other business related items, not by things like itemized deductions or your standard deduction.

So, if you have $20,000 in self-employment income after expenses, you will have $3,060 in self-employment taxes.  This is calculated separate from your ordinary income. If the $20,000 is your only income, then you would have the $3,000 subtracted from then, then you would have your standard deduction deducted from that so if you were head of household, you would have no taxable income, but you would still owe $3,060 for your SE tax because that is  the Medicare and Social Security taxes. Various credits would also affect your ordinary taxes but not your SE taxes (Unless they are refundable, then that amount will be used to pay for your SE tax instead of being sent to you)

In this situation, you would not see any benefit from your loss carryovers because it will only reduce your taxable income, not your self-employment FICA taxable amount. 

[tagteam · Accepted solution]

See https://www.irs.gov/taxtopics/tc409

Limit on the Deduction and Carryover of Losses

If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040).

[Tjones8226]

Hi, tagteam.

Sigh... That is frustrating, because of course I had $40,000 in capital gains in the year PRIOR to these latest losses - so I had to pay significant taxes on the 2021 gains. Who knows if I'll have any future gains that can be offset by the $3k carryforward. (One can hope!)

[Tjones8226]

Thank you, Vanessa! That is not what I wanted to hear, but I really appreciate your quick and thorough response! Very helpful explanation.