Key takeaways
What this article covers, in order:
- What counts as a capital loss
- Short-term versus long-term
- How the netting works on Schedule D
- Worked example: a Columbus copywriter's bad trading year
- The capital loss carryover rules
- The wash sale rule: when a loss is disallowed
If your capital losses are bigger than your capital gains, you can deduct the net loss against your other income, but only up to $3,000 a year ($1,500 if you are married filing separately). Whatever is left over is not lost: it carries forward to the next year, and the year after, until it is completely used up.
That simple rule sits on top of a netting process, a holding-period test and a few traps, notably the wash sale rule. This guide works through each with figures from the 2025 IRS guidance, which is the latest full set of instructions available as of November 2026; the $3,000 limit itself is a fixed dollar amount, not one the IRS adjusts for inflation each year.
What counts as a capital loss
Most property you own for personal or investment use is a capital asset: stocks, bonds, mutual fund shares, crypto and other digital assets, and collectibles. You have a capital loss when you sell one for less than your adjusted basis, which is usually what you paid plus fees and any adjustments.
Two exclusions matter right away:
- Personal-use property. The IRS is clear that losses from selling your home or car "aren't tax deductible." Sell your car for less than you paid and there is no deduction, though a gain on the same car would be taxable.
- Business property. Equipment, vehicles and buildings used in a trade or business are generally reported on Form 4797 under separate rules, not as ordinary capital losses on Schedule D.
Short-term versus long-term
Hold an asset for more than one year and the gain or loss is long-term; one year or less and it is short-term. The distinction matters for gains, because short-term gains are taxed as ordinary income while long-term gains usually get 0%, 15% or 20% rates. For 2025, the 0% rate applied to long-term gains for single filers with taxable income up to $48,350, and up to $96,700 for married couples filing jointly.
How the netting works on Schedule D
You report individual sales on Form 8949 and summarize them on Schedule D. The netting runs in three steps:
- Net short-term gains against short-term losses.
- Net long-term gains against long-term losses.
- Combine the two results. If the total is a loss, that is your net capital loss for the year.
Your deduction against other income is the smaller of that net loss or $3,000 ($1,500 married filing separately). The allowed amount is entered on Form 1040 as a negative number.
Worked example: a Columbus copywriter's bad trading year
Dana is a self-employed copywriter in Columbus who also trades in a brokerage account. Her 2025 Form 8949 shows:
- Short-term gains: $2,000
- Short-term losses: $9,500
- Long-term gains: $4,000
- Long-term losses: $1,500
- Net short-term: $2,000 − $9,500 = a $7,500 short-term loss.
- Net long-term: $4,000 − $1,500 = a $2,500 long-term gain.
- Combine: $2,500 − $7,500 = a $5,000 net capital loss.
- Deduct: she files single, so she deducts $3,000 against her Schedule C profit and other income on her 2025 return.
- Carry over: $5,000 − $3,000 = $2,000 goes to 2026. Because her net loss came entirely from the short-term side, the IRS carryover worksheet treats the $2,000 as a short-term capital loss carryover.
In 2026, that $2,000 enters her Schedule D as if she had incurred it that year. If she has $6,000 of long-term gains in 2026, the short-term carryover offsets part of them, and she pays tax only on the remaining $4,000 gain. If she has no trades at all in 2026, she can deduct the $2,000 against her other income.
The capital loss carryover rules
- No expiry during your lifetime. Pub. 550 says you can carry an unused loss over to later years "until it is completely used up."
- Character is preserved. A carried-over loss stays short-term or long-term. A long-term carryover reduces long-term gains first, before short-term gains.
- Short-term losses are used first. When working out how much carries over, short-term losses are absorbed by the current year's deduction before long-term losses.
- You must count the deduction you were allowed, even if you did not claim it or did not file. You cannot skip the $3,000 in a low-income year and save it for later.
- Negative taxable income can enlarge the carryover. The part of the loss treated as used is the lesser of your allowable deduction or your taxable income plus that deduction, so in a year when deductions exceed income, more of the loss carries forward. Worksheet 4-1 in Pub. 550 does the arithmetic.
- Spouses. If you once filed jointly and now file separately, a joint carryover can be used only by the spouse who actually had the loss.
- Death ends it. A loss of a person who dies can be deducted only on the final return, subject to the same limits; the estate cannot carry it forward.
The wash sale rule: when a loss is disallowed
You cannot deduct a loss on stock or securities if, within 30 days before or after the sale, you buy substantially identical stock or securities, acquire them in a fully taxable trade, acquire an option to buy them, or buy them in your IRA or Roth IRA. A purchase by your spouse or a corporation you control also counts.
The loss is not gone forever in most cases. It is added to the basis of the replacement shares, and your holding period carries over, so you get the benefit when you finally sell the new position. The exception is the IRA purchase: Pub. 550 excludes that case from the basis adjustment, so the loss is effectively lost.
Example: you sell 200 shares at a $1,800 loss on December 10 and buy the same fund back on December 28. The $1,800 is disallowed for that year and added to the cost of the new shares.
Worthless stock and bad personal loans
Stock that becomes completely worthless during the year is treated as sold on the last day of that tax year, which can turn what you thought was a short-term loss into a long-term one. Report it on Form 8949. Because it is often unclear when a security became worthless, the IRS allows 7 years from the original due date to amend for a worthless-security loss, rather than the usual 3.
A nonbusiness bad debt, such as money you lent a friend that will never be repaid, is treated as a short-term capital loss and is subject to the same $3,000 limit.
A special case for founders: section 1244 stock
If you invested directly in a qualifying small business corporation and the stock becomes worthless or is sold at a loss, section 1244 may let you treat the loss as an ordinary loss rather than a capital loss, up to $50,000 a year, or $100,000 on a joint return. Ordinary losses are not capped at $3,000. You must be the original owner of the stock, and the company must meet the gross-receipts tests in Pub. 550, so keep the original subscription documents.
What to watch for
- Lost carryovers. Changing tax preparers is a common way for a carryover to disappear. Keep a copy of last year's Schedule D and carryover worksheet.
- Reinvested dividends within 30 days of a loss sale can trigger a partial wash sale.
- Basis errors. If your Form 1099-B shows no basis, or basis that needs adjusting, you must report the sale on Form 8949 with the correct figure rather than summarizing it.
- Mixing business and personal. Selling a personal car at a loss is not deductible; selling a business vehicle follows Form 4797 rules.
Keeping records that support your loss
Capital losses are a personal-return item, so most of the paperwork lives with your brokerage. Where your business is involved, for example section 1244 stock you bought in your own company or securities held by your business, the books need to show what was paid and when. In HelloBooks you can attach purchase documents to the transaction, AI document extraction pulls the amount and date from a PDF statement, and the audit trail records any later change to the entry. Assets your business uses, such as vehicles and equipment, belong in the fixed assets register, which keeps cost and depreciation separate from your personal investments.
This is general information about the US capital loss deduction as of November 2026, not tax advice; check IRS Publication 550 and the Schedule D instructions, or ask a CPA about your own losses.
