Capital Loss Carryforward
Excess capital losses beyond the annual $3,000 limit that are applied against income in future tax years.
What is Loss Carryforward?
A capital loss carryforward occurs when your capital losses in a given tax year exceed both your capital gains and the IRS's $3,000 annual deduction limit against ordinary income. The excess loss is carried forward indefinitely until fully used. In each future year, carryforward losses first offset capital gains dollar-for-dollar, and any remaining amount can reduce ordinary income by up to $3,000. This mechanism prevents investors from losing the tax benefit of large investment losses in a single year.
Example
An investor realizes $25,000 in capital losses and $10,000 in capital gains in 2024, for a net loss of $15,000. They deduct $3,000 against ordinary income, leaving a $12,000 carryforward. In 2025, if they have $5,000 in gains, the carryforward eliminates those gains and reduces ordinary income by another $3,000, leaving a $4,000 carryforward.