Capital loss carryover
Also: capital loss carryover, loss carryforward, capital loss carry-forward
Net capital losses exceeding $3,000 in a tax year that carry forward indefinitely to offset future gains. The $3,000 annual offset against ordinary income continues until the carryover is exhausted.
When total capital losses exceed capital gains in a year, the excess is first used to offset up to $3,000 of ordinary income ($1,500 if married filing separately). Remaining losses carry forward indefinitely. The carryforward keeps its character, short-term losses remain short-term, long-term losses remain long-term. At the taxpayer’s death, any unused carryover is lost: it does not transfer to heirs.
Example: an employee has $85,000 of realized losses and no gains in 2024. She uses $3,000 against 2024 ordinary income. The remaining $82,000 carries into 2025. In 2025 she realizes $60,000 of long-term gains from RSU sales. The carryforward offsets all $60,000, and the remaining $22,000 offsets up to $3,000 more of 2025 ordinary income. A $19,000 balance continues to 2026.
Common mistake: switching tax preparers and failing to migrate the carryover. Check the prior-year Schedule D line 15 and line 16 for short- and long-term carryover balances.
Capital loss carryovers matter at each year’s tax filing, at planning a large gain year (Roth conversion, ISO exercise, QSBS sale), and at estate planning, where unused carryovers should be consumed while the taxpayer is alive.