Capital Gains and Losses / Carrybacks and Carryovers
Investment losses can be used to offset ordinary taxable income, thereby reducing your taxable income. Although you may be limited to how much income you can offset in a given year, the Internal Revenue Service allows you to carry over your loss into future years, so that a large loss in one year can reduce taxable income over a period of several years.
How Capital Gains and Losses Work Together
If you have multiple investments, in a given year you might have both capital gains and capital losses, depending on your mix of investments and how they performed. A net capital loss is the amount that total capital losses exceed total capital gains. A capital loss carryover is the net amount of capital losses eligible to be carried forward into future tax years.
Losses offset gains. If in a given year, you have more losses than gains, you’ll have a net capital loss. U.S. tax law allows you to use $3,000 of that net loss as an offset to ordinary income, and the rest gets carried forward into future years, offsetting capital gains and ordinary income every year until it is used up.
Maximize Use of Losses to Offset Income
As an investor, one aspect of your tax planning can be to look for unrealized losses in your portfolio. You have an unrealized loss when you own an asset that has decreased in price or value. You might continue holding onto the asset, hoping that its price will recover. Alternatively, you could sell that investment at a loss. Once you’ve realized the loss, you can use it to offset other capital gains or ordinary income if you wind up with a net capital loss. The intentional practice of selling securities at a loss to offset taxes from gains on other investments and income is known as tax-loss harvesting. It is a legal, strategic method of minimizing tax liability that is worth considering during year-end tax planning or at other times.
Beware of the IRS Wash-Sale Rule
Stock that has been sold for a loss cannot be repurchased within 30 days without running afoul of the IRS wash-sale rule. If a sale and subsequent repurchase were considered a wash sale, you would not be allowed to use the loss to offset capital gains or income. However, you are free to repurchase the stock after 30 days without incurring any penalty or losing the deduction. The wash-sale rule can also be triggered by selling shares outside of a retirement account but then buying substantially identical shares in an IRA within 30 days. It is vital to be aware of the many intricacies of the wash-sale rule and how it can impact your capital gains and loss carryover.
Carryback and Carryover Rules for Corporations
Corporations can carry back a net capital loss for three years and carry forward a loss for five years. This carryback potential is especially relevant at present, given the lowering of corporate tax rates under the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA lowered the top corporate income tax rate from 35% to 21%. Any net capital gains combine with other taxable income and are subject to the same tax rate, i.e., 35% pre-TCJA and 21% post-TCJA. A net capital gain cannot be carried back or forward but instead must be reported in the year it is realized. If you had a net capital loss post-TCJA, you could maximize those losses by carrying them back to offset capital gains taxed at the higher pre-TCJA rate, resulting in significant tax savings.
Get the Advice and Help You Need with Capital Gains and Losses
For practical, strategic advice and technical assistance with capital gains and losses, carrybacks and carryovers, call Lehman Tax Law at 561-368-1113 for a complimentary consultation with a skilled and knowledgeable U.S. tax law attorney.