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Capital Pains: Rules for Capital Losses

by Julian Block

Capital Pains: Rules For Capital Losses Splash image

When securities markets swoon and apprehensive investors bail out of their holdings, they console themselves with deductions for capital losses when it comes time to file taxes.

But long-standing rules limit deductions for losses on sales or redemptions of shares of individual stocks, bonds, mutual fund shares and exchange-traded funds (ETFs).

The big hurdle is Internal Revenue Code Section 1211, which caps the deduction at $3,000 for both married couples and single filers. (Married couples who file separate returns are limited to a maximum deduction of $1,500 per person.) These dollar limits haven’t been revised upward since they went on the books in 1978, when Jimmy Carter was in the White House.

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Julian Block is an attorney and author based in Larchmont, New York. For information about his books, visit www.julianblocktaxexpert.com.


Discussion

Lee Wenzel from Minnesota posted over 3 years ago:

One implication to be drawn from this very valuable article is that the couple should not let their $90,000 in losses be carried forward for 30 years, writing off $3,000 against income each year. That loss should be considered an asset and not allowed to just sit there. They need to get back on that horse after being tossed. Capital gains now have a no-tax advantage for them over other forms of investment. Just like municipal bonds are often compared to other investments on an after-tax basis, they can do the same with capital gain investments. The mistake would be to exclusively hide in CDs and dividends.


Marc from Florida posted over 3 years ago:

How would you use it as an asset when the loss can only offset gains incurred in the same year as the loss or the $3k/yr against income?


Oreon from Massachusetts posted over 3 years ago:

It is my understanding that the unused prior years losses can offset future capital gains, without be subject to the $3000 per year exclusion. It is also my understanding, but I need to verify this, that the Capital Loss Carryforward (those unused losses) can be used on any capital gain, ST and LT, irrespective of what they were in the original loss.

So what Lee, above, was saying ... instead of waiting 10 years at $3K per year to run this 'asset' off, ... feel free to sell out of an appreciated asset that you no longer wish to be invested in, offsetting its gains against this unused Loss Carryforward. Otherwise you might be inclined to hold it perhaps longer than you preferred to avoid paying the taxes on its gains.


Blake from North Carolina posted over 3 years ago:

We have used TaxCut to fulfill the compelled drudgery. When a capital loss is computed it completes a "worksheet from the instructions" to "adjust", i.e. minimize, the loss carry forward. This entirely contradicts the assertion that the entire amount of loss exceeding $3000 can be applied in subsequent years. We would love to know that the computer program is incorrect but would be grateful for knowing authoritatively which is right.


Martha from California posted over 2 years ago:

Why do I need to SIGN IN every time I log in to read the articles on the internet if I am a MEMBER?????????????

marthakritt@verizon.ne


Thomas from Virginia posted over 2 years ago:

In most case one would want to minimize the loss carried forward since this minimizes your taxes in that year. You do NOT have a choice to use $3000 of the loss against "ordinary income" each year (even if you have no income $3000 of the loss is used each year [IRS Pub 17 pg 114 tax year 2010].


Eric from New Jersey posted over 2 years ago:

Next spring my wife intends to sell our home at an estimated loss of at least $500,000. We file jointly and have two 1032 property investments for 6 years at a cost of $230,000, if we were to sell them, could we use the loss against the profit? Which other gains may be used?


Timothy Bruce from Virginia posted about 1 year ago:

The wash sale loss disallowed in the
current year is not gone forever.
The loss is used to adjust the basis
of your new shares and can be realized
when they are sold as an adjustment in
basis.


Henry Will from Florida posted about 1 year ago:

(1). Can capital gain distributions from a mutal fund company be offset by losses of the sale of stock in a different company?

(2). Can capital gain distribtions from a mutal fund company be offset by selling shares at a loss from the same company?


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