Capital Loss Carryovers

There are many misconceptions about capital-loss carryovers.

Many traders mistakenly think they can only utilize $3,000 of capital-loss carryovers each year going forward, so they worry it can take a lifetime to use up these losses. They don’t realize capital losses offset subsequent-year capital gains without limitation, which means if they remain in capital gains treatment (rather than electing Section 475 MTM ordinary income), they can use those capital losses. The $3,000 limitation is against non-capital gains income, not capital gains.

Some traders mistakenly think individually generated capital-loss carryovers incurred before trading in a new pass-through entity will be lost. The new company can forgo a Section 475 election and pass-through capital gains on a Schedule K-1 to individual tax returns (Schedule D), where individual capital-loss carryovers offset them.

For more information, see Green’s Trader Tax Guide Chapter 3 on Financial Products.