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Long term losses can be carried forward

Posted by Jill Boynton  February 10, 2010 10:37 AM

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"Do you have to use a long-term capital loss if you don't need it in a given year?  Or can you carry it forward to a future year when you may need it?"


The rules for using capital losses are very precise.  In a nutshell, you must first net any short-term gains and losses, and separately net any long-term gains and losses.  When that is done the next step is to net the long- and short-term figures.  There are different combinations of gains/losses you could end up with and I won't go into them here, but click here for further information.  Let's talk just about a net long-term capital loss (LTCL).

By definition, a net LTCL means that, if you also had capital gains, you've used as much of the loss as needed to offset the gains.  That's why we're referring to it as a "net" loss.  So what can you do with the excess loss?

The IRS allows you to use that excess loss to offset your ordinary income (that derived from sources other than capital gains) up to $3,000.  So if you have $2,000 of net LTCL you can offset $2,000 of ordinary income.  But if you have $4,000 of net LTCL you can offset only $3,000 of ordinary income. 

Offsetting ordinary income is a very nice benefit of capital gains because most likely that ordinary income is being taxed at an income rate higher than the 15 percent long-term capital gains rate. 

If you have still more net capital losses after offsetting ordinary income, you can carry the loss forward to next year's taxes.  At that time you will, again, use the loss to offset capital gains and then ordinary income.  And if you still have losses after that you carry it forward to the next tax year.  This can go on indefinitely - there is no time limit to use up your long-term losses other than death.  At your death any carryforward loss dies with you.

"Harvesting" tax losses is a common tax-planning tool used by financial planners.  If you have a big paper loss in a taxable account from an investment that lost a lot of value in the past several years, consider realizing that loss and using it to reduce your taxes.  Just be careful of the "wash sale rule" which says that you can't buy the same exact investment within 30 days before or after the sale or the loss is negated.  Definitely consult your accountant or financial planner to make sure you carry this strategy out correctly.

This blog is not written or edited by Boston.com or the Boston Globe.
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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

About the contributors

D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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