Capital Loss Carryover

Each year, Schedule D nets your capital gains and losses. If the result is a net loss, you deduct up to $3,000 of it against wages, pensions and other ordinary income, or $1,500 if you are married filing separately. Whatever is left becomes next year’s carryover, and IRS Publication 550 says to treat it as if you had incurred it in that next year.

The carryover keeps its character. A short-term carryover first reduces next year’s short-term gains and a long-term carryover first reduces long-term gains; any excess then offsets gains of the other kind. Anything left after all of the year’s gains can take that year’s $3,000 deduction, and the remainder rolls on again.

For individuals there is no expiration date, so a large loss can take decades to use up at $3,000 a year if you realize no gains. Apart from an election for losses on certain futures contracts under section 1256, individuals cannot carry capital losses back to earlier years. Nor can you skip a year: the carryover is applied to the next year’s gains automatically.

The IRS provides a Capital Loss Carryover Worksheet in the Schedule D instructions and in Publication 550, and it starts from last year’s return. In most years the answer is simple: the carryover equals your net capital loss minus the deduction you were allowed. The worksheet matters in low-income years. Under section 1212, the deduction uses up the loss only to the extent of your adjusted taxable income: taxable income plus that deduction and any section 151 deduction, which for 2025–2028 includes the senior deduction. Negative taxable income counts. If your other deductions already wiped out your income, the part of the $3,000 you could not use stays in the carryover instead of disappearing.

The worksheet then splits the carryover into short-term and long-term parts, charging the year’s deduction against short-term losses first. Two rules trip people up. You must reduce the carryover by the deduction you were allowed even if you never claimed it or did not file a return. And the $3,000 limit is a fixed dollar amount in the statute, not adjusted for inflation, so it is the same for 2026 as it has been for decades.

Carryovers follow the person who had the loss. If spouses who filed separately start filing jointly, they combine their carryovers. If a couple who filed jointly switches to separate returns, including after a divorce, a joint carryover can be deducted only by the spouse who actually had the loss, so keep records of whose account produced it. Each spouse filing separately is also limited to $1,500 a year; see married filing separately.

Death ends a carryover. IRS Publication 559 says a decedent’s capital losses, including carryovers, can be deducted only on the final income tax return, and the estate cannot deduct them. On a joint return for the year of death the loss is netted on that return as usual, but the deceased spouse’s unused share cannot move into the survivor’s later returns, because a joint carryover belongs to the spouse who had the loss. When one spouse holds a large carryover and is in poor health, realizing gains before death, such as on assets that will not get a step-up in basis, can put the loss to use before it disappears.

An estate’s own losses work differently. If an estate realizes losses while it is being settled and still has a carryover when it terminates, Publication 559 lets the beneficiaries who receive its property claim it.

Because a carryover is applied automatically, the planning happens around it. It pairs naturally with gains you would realize anyway: rebalancing a taxable brokerage account, selling a concentrated stock position, or selling a second home at a gain. Each of those gains can be absorbed before any tax is due. It also means that once a carryover already covers the $3,000 deduction, tax-loss harvesting in a year without gains simply adds to the pool for later.

The trade-off shows up in low-income years. A carryover soaks up gains that would have been taxed at 0%, which makes tax-gain harvesting far less useful until the pool is gone, and each $3,000 deduction is worth less at a 10% or 12% marginal rate than at 24% or more. None of this changes how much you can deduct in total, but it does change which years are the best ones to realize gains.

Keep the paperwork: the loss years’ Schedule D, Form 8949 and the worksheet support the carryover every year it appears, which can be a long time.