Capital Loss Carryforward

When your capital losses exceed your capital gains in a given year, the excess creates a capital loss carryforward. After using $3,000 of net losses to offset ordinary income (the annual limit), any remaining losses carry forward indefinitely to future tax years.

Capital loss carryforwards retain their character — short-term losses carry forward as short-term, and long-term losses carry forward as long-term. In future years, carried-forward losses offset gains of the same type first, then can offset gains of the other type.

This mechanism is particularly valuable after major market downturns. If you realized $50,000 in losses during a bear market but only had $10,000 in gains, you'd use $10,000 to offset gains, $3,000 against ordinary income, and carry forward $37,000 to future years.

Tracking carryforwards requires keeping records across tax years. The Capital Loss Carryover Worksheet in the Schedule D instructions calculates how much carries forward. Many taxpayers lose track of carryforwards, especially when switching tax software or accountants.

Strategic use of carryforwards involves timing future gains to coincide with available carryforward amounts. If you have a large carryforward, it may be a good year to rebalance, sell appreciated assets, or take profits — the carryforward will shield those gains from tax.