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What Happens If You Have Excess Capital Losses?

Did your capital losses in 2012 exceed your capital gains?  No problem. Under the laws of the land, you could “carry over” that net loss to next year after using it to offset up to $3,000 of ordinary income on your 2012 federal income tax return.  That way, the excess loss can reduce your tax liability on the 2013 return you file in 2014.

Capital gains and losses recognized during the year are “netted” for income tax purposes.  If you show a net gain for the year, the gain is taxed under the applicable tax rules.  Conversely, if you show a net loss, you can use up to $3,000 of that excess to offset highly taxed ordinary income from wages and the like.  Then you can carry over any amount that remains to the next year.

Suppose you had a net long-term gain of $10,000 from securities sales in 2012.  For most taxpayers, that gain is taxed at a maximum 15% rate.  (The maximum rate increases to 20% in 2013 for some upper-income investors.)  However, if you realized a net long-term capital loss of $10,000 in 2012, you may use $3,000 of the loss to offset ordinary income.  The remaining $7,000 is carried over to 2013.

How long can you carry over a capital loss?  Indefinitely.  However, you must begin using the loss in the first available tax year.  In other words, you can’t postpone a carryover loss until a tax year in which it will do you the most good.

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