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Am I limited to deducting only $3000 per year of my capital losses?

Thursday, June 18, 2015
Am I limited to deducting only $3000 per year of my capital losses?

Yes and no.  For non-corporate taxpayers, capital losses must be first deducted against capital gains (limited only by the amount of the gain).  Any remaining capital loss can then be used against ordinary income up to a maximum of $3000 per year until the remaining loss is used.  This rule is applied each year. 

For example:  In year 1X, a taxpayer has short term capital gains (STCG) of $2,000, long term capital gains (LTCG) of $5,000 and short term capital losses of (STCL) $13,000.  Since short term losses must first be applied to short term capital gains and then to long term capital gains before the remainder can be applied to ordinary income; the taxpayer would first wipe out the $2,000 STCG leaving $11,000 ($13,000 - $2,000) STCL to be used against any long term capital gain.  Next the taxpayer would apply $5,000 of the remaining $11,000 STCL to reduce the LTCG to zero leaving $6,000 STCL, of which $3,000 can be used to reduce ordinary income in year 1X and another $3,000 in STCL available for use in year 2X.  The same ordering rules would apply in year 2X.