Can You Deduct a Capital Loss on Your Taxes?

What Is a Capital Loss?

A capital loss occurs when you sell an investment for less than you paid for it. For tax purposes, a capital loss only counts if it's realized—that is, if you sell the investment. If your investments drop in value but you hold on to them, your unrealized loss doesn't affect your taxes.

The following capital loss rules apply to investments like stocks, bonds, mutual funds, cryptocurrency and real estate. They don't apply to personal-use items like your car or home.

Tip: Special rules apply to capital gains from the sale of your home. While you generally can't deduct a loss, you may be able to exclude up to $500,000 from capital gains taxes.

Compare tax preparation services

You could save time preparing your taxes, and get assistance maximizing your refund. Plus, many services provide audit assistance to give you confidence when you file.

Are Capital Losses Tax Deductible?

Capital losses are tax deductible: They are first used to offset capital gains, then can be used to offset ordinary income, up to a limit. To use the deduction, follow the steps below to report your capital gains and losses, calculate your net gain or loss, and claim a capital loss on your tax return.

How to Deduct Capital Losses on Your Tax Return

To deduct capital losses on your Form 1040 tax return, first calculate your net long-term and short-term capital gains. Here's how to do it, step by step:

1. Review your gains and losses for the year. Gather up your tax documents related to capital gains: IRS Form 1099-B (proceeds from a broker or bartered exchange) or 1099-DA (digital asset proceeds from a broker). If you worked with more than one investment company, broker or financial institution, you may have more than one 1099.
2. Categorize your transactions. Use Form 8949 to divide your transactions into long-term gains, short-term gains, long-term losses and short-term losses. A long-term investment is one that's held for more than a year.
3. Calculate net long- and short-term gains or losses. On Schedule D, subtract your long-term losses from long-term gains and short-term losses from short-term gains.
4. Determine your net loss. Add your long-term gain or loss to your short-term gain or loss to get a single net gain or loss. Enter the net gain or a net loss of up to $3,000 (or $1,500 for married people filing separately) on line 7a of your Form 1040.

Using Capital Losses to Offset Gains or Income

You can use a capital loss to offset capital gains and up to $3,000 of income on your tax return. Any leftover capital loss can be carried over to reduce taxable capital gains and income in future years as well.

Here's a look at how a capital loss might apply over multiple years. Say, for example, you have the following capital gains and losses for the year:

• Short-term capital gain: $0
• Short-term capital loss: $20,000
• Long-term capital gain: $8,000
• Long-term capital loss: $1,500

In this example, you show a short-term loss of $20,000 ($0 - $20,000) and a long-term gain of $6,500 ($8,000 - $1,500). Netted against each other, your gains and losses result in a loss of $13,500.

You can deduct your net loss of $13,500 from your regular income—but not all at once. The IRS allows you to deduct up to $3,000 in capital losses from your ordinary income each year, or $1,500 if you're married filing separately. If you claim the $3,000 deduction, you will have $10,500 in excess loss to carry over into future years.

In the future, you can use this carryover deduction to reduce any capital gains you have and up to $3,000 in ordinary income each year until your excess is gone.

Capital Gains Rules to Remember

Here are a few rules to consider as you calculate, claim or carry over a capital loss:

• Use any amount of capital loss to offset capital gains. If you have $10,000 in capital gains and $5,000 in capital losses, you can subtract the full $5,000 in losses from your capital gain.
• Apply up to $3,000 in excess capital loss to your income. If you're married filing separately, the limit is $1,500.
• Use excess capital loss to reduce capital gains in future years. You can use the full amount of capital loss to offset capital gains; the $3,000 limit does not apply to taxable capital gains.
• Carry over leftover losses to offset income in future years. The $3,000 (or $1,500) limit does apply here. Any excess loss from this year can be carried forward to the next.

Tip: You can sell assets at a loss deliberately to offset capital gains. However, you may want to consult a financial advisor before trying your hand at tax loss harvesting, to make sure selling at a loss makes sense in your situation.

The Bottom Line

Taking a loss isn't ideal, even when it's tax deductible. Most of us would prefer to make money, even when it means paying taxes. Still, when you have a capital loss, you can put it to good use by deducting it from your net capital gains and income. Saving money on your taxes may be the next best thing to making money on your investments.