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Capital Loss Carryover and Offsetting Ordinary Taxable Income

What is a capital loss carryover?

If we define capital loss carryover, it is the net amount of capital losses that one can carry forward to the future tax years. But what is net capital losses? It is a capital loss that goes beyond capital gains. Its maximum deduction can only be up to $3,000 every tax year. If the deductions go beyond that, they may be carried forward to the future tax years until no more is left. The possibility of having a capital loss carryover has no limit in terms of years.

Anyone might agree that they do not want to have losses. So, if there is a loss, you will look for ways to lessen the impact at least, and one of these ways includes capital loss tax provisions. These provisions can only do so much, so they come with exceptions. An investor who wants to lessen losses or taxes should know how things work. Hence, he should know what wash sale and its provisions mean. It tells us that you cannot repurchase the same investment within a month (30 days) after selling it for a loss. In this case, it is impossible to apply capital loss in tax calculations. Instead, it is added to the new position’s cost basis. This, now, will help reduce the impact of future capital gains.

Next, we have tax-loss harvesting.

Tax-loss harvesting is a way to improve the after-tax return on investments that can be taxed. A person sells securities at a loss and then uses them to offset taxes from gains from other income and investments. How many losses are harvested? These losses are the ones that will be carried forward to offset future gains in the coming years. The most common month that this practice happens is during December. December 31 is the last day that one can realize a capital loss.

Accounts with investments that can be taxed will pinpoint all the realized gains for the year. Hence, investors also want to pinpoint unrealized losses so they can offset those gains. In a sense, the investors can pay lesser capital gains tax. As the wash sale rule states, investors who want to repurchase a similar investment should wait for at least a month to do so.

Let us cite an example.

Let us say that you have a taxable account with $20,000 realized gains incurred within the year. However, your portfolio also has Stock A with an unrealized loss of $15,000. You may sell this stock before the year ends to realize the loss. If you sold it before the year ends, you would realize $5,000 in capital gains. If you sold Stock A on December 25, you need to wait for another month, which is at least January 25, if you want to repurchase it. In another scenario, let us explain how excess capital losses work. Let us say that Stock A comes with a $25,000 loss instead of $15,000. You can carry over that difference to the tax years to come.

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