Clarification of capital gains?

Question

This subject seems to need some detailed clarification unless I've made the wrong determinations.  Are these statements true? 

1.On your tax return for any given year you can cancel out taxes due on capital gains if you have equal or more in capital losses.

2. If you have more capital losses than gains in any taxable year you can use up to $3000 in carryover losses to reduce any other source of income for that year.

3. If, in subsequent years, you still have a balance in carryover losses they can be used to reduce taxable income in amounts of up to $3000, until depleted.

4. The $3000 limit on carryover losses has nothing to do with the total allowable off set of capital gains by capital losses in any one tax year.  It applies only to the carryover portion if losses exceed gains in that particular year.

I've read numerous articles at many different website and it appears that there's a lot of confusion regarding the $3000 amount.  Most people seem to assume that it is a limit as to how much in capital gains can be offset by capital losses each year, unless of course I'm wrong in my statements above.

Mathew · Accepted Answer

The $3,000 limit only applies to using capital loss against non-capital income.  If you had $100,000 carryover from 2007 and $97,000 capital gain in 2008 you would use $97,000 of the carry over against the gain and could use the remaining carryover against non-capital income for 2008.  But you are not alone in the confusing over this issue.  Some pretty bright folks have misunderstood this issue.

Anonymous · Answer

If the articles are confusing, it's because they (or you) have never done the schedule D form.

Each year the carryforward is reinvented as a line item on the schedule D.  It is then part of the total for that year.  So yes, if you have a "great" year, you can absorbe the entire carry forward in that one year.

The problem is that many people, once bitten, avoid the stock market and never had another year with large gains.

GARF · Answer

I'm not totally certain what you mean by the last sentence of your 4th point, but you are otherwise correct as to your understanding of the issue of carry forward capital losses.

? · Answer

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Clarification of capital gains?

4 Answers