Capital loss

Explanation

When you sell an investment in a taxable account for less than your cost basis, you realize a capital loss. Losses are netted against gains in a set order: short-term losses against short-term gains, long-term against long-term, then any remaining loss in one category against gains in the other.

If you still have a net capital loss for the year, you can deduct up to $3,000 of it against ordinary income such as wages ($1,500 if married filing separately). This limit is fixed in law and not indexed. Any loss beyond that carries forward to future years with no expiration, keeping its short-term or long-term character, until it is used up. Unused carryforwards generally expire at death.

Tax-loss harvesting means selling an investment at a loss on purpose to bank the deduction, usually buying a similar (but not substantially identical) investment to stay invested. The wash-sale rule disallows the loss if you buy the same or a substantially identical security within 30 days before or after the sale, including in an IRA. A disallowed loss is added to the basis of the replacement shares rather than lost forever, except when the replacement is bought in an IRA.

Losses inside retirement accounts are not deductible. In scenarios, the app can carry forward realized losses and apply them to future gains and the $3,000 ordinary-income offset.

Example

In one year you realize $5,000 of long-term gains and $20,000 of long-term losses.

• Net capital loss: $20,000 − $5,000 = $15,000
• Deduct against ordinary income this year: $3,000
• Carryforward: $15,000 − $3,000 = $12,000

If you are in the 22% bracket, the $3,000 deduction saves $660 this year, and the $5,000 of gains you offset would otherwise have cost $750 at 15%.

Next year, if you realize $10,000 of gains, the carryforward wipes them out and leaves $2,000, which you deduct against ordinary income.