Tax Department

Frequently Asked Questions Regarding Capital Losses

Many investors have incurred losses in this investment environment.

This information is provided as a public service, and should not be construed as individual accounting or tax advice. For information on how these general principles apply to your situation, please consult your Cook & Co. Agent.
Can I take a long-term capital loss (up to the $3,000 limit) against my ordinary income without any long-term capital gain?
Yes. The $3,000 capital loss limitation refers to how much net capital loss can offset ordinary income on your tax return.
April 15 Tax Filing Deadline
Can I use a long-term capital loss carried over from a prior year to offset a short-term capital gain?
A loss carryover maintains its character as long-term or short-term and must first be used against gains, if any, in its own category, but can then offset net gains from the other category, as well as up to $3,000 of ordinary income.
If, for example, your only gain or loss is the long -term capital loss carryover, then line 17 of Form 1040, Schedule D, which nets the net short-term gain or loss against the net long-term gain or loss, will apply your loss carryover against your short-term gain. After that, any remaining net loss will be allowable as a deduction against up to $3,000 of your ordinary income. The remainder will be available to be carried over to the following year as long-term loss.

Can I use a long-term capital loss to offset a short-term capital gain before using it to offset a long-term gain?
No, long-term capital gains and losses must first be combined to arrive at net long-term gain or loss before the result can be netted against the net short-term gain or loss.
If you follow the Form 1040, Schedule D, Capital Gains and Losses, Parts 1 and 2, line-by-line, the form will perform the netting for you in this order.

How do I determine my gain or loss on the proceeds reported on from a short sale entered into last year if I have not yet bought the stock to deliver back to my broker?
In general, you cannot determine your gain or loss until you purchase the stock that you are going to deliver to close the short sale. You still need to report the gross proceeds on Schedule D so that the total of lines 3 and 10, column (d), reconciles with all of your Forms 1099-B.
Also, in columns b and c write "short sale." In column f, write "see attached statement." In the statement, explain the details of the short sale and that it is not closed. Include your name as it appears on your return and your social security number.

Can short-term capital gains be offset with long-term capital losses?
Before a loss from one category, short or long term, can offset gain from the other category, the losses and gains from each category must be combined to arrive at a net gain or loss from that category. Then, the net gain or loss from each category is combined.
When you carry a capital loss over to the following year, it retains its character as long-term or short-term and must be first combined with the other entries in its category.

Knowing when to book a tax loss and how much tax loss to book can make a huge difference! Avoiding the "Wash Sale Rules" is also extremely important! If you are emotionally attached to a stock and absolutely cannot bring yourself to part with it, there is a way you can book the tax loss and retain your stock with minimum risk!

Have you ever received a tax document that has bold print that reads "CONSULT YOUR TAX ADVISOR"?

Bring it to us! The reason for those disclaimers is because of the potential liability associated with providing tax advice. Providing tax advice is what we do. But please remember that when you are with your agent working on the current tax returns, if you have tax questions about the future, try to hold those until the end of the interview. Once your agent has gathered all of your information and keyed it into our computer system, he will have an updated snapshot picture of your tax and financial situation on his computer screen and will be better equipped to answer questions about the future.

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Cook and Co., Enrolled Agents are licensed by the U.S. Treasury Department to represent taxpayers before the Internal Revenue Service (IRS). Greg Cook is also an Accredited Tax Advisor and a Certified Public Accountant (CPA) licensed by the states of Alabama and Tennessee.

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authorGregory J. Cook, EA, CPA+
Accredited Tax Advisor
Past President Alabama Society of Enrolled Agents
Past President Alabama Association of Accountants
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