Can Short-Term Losses Carry Forward to Offset Long-Term Gains?
Short- and Long-Term
- When dealing with capital gains and losses, they fall into one of two categories. Your loss will either be a short-term loss or a long-term loss. If you hold the property for longer than one year, it is considered a long-term loss or gain. If you hold the property for less than one year, it is considered a short-term loss or gain. The tax rates for long-term gains are lower than the rates for short-term gains.
Carry Forward Losses
- When you have a capital loss, the IRS may allow you to carry part of it forward to a future year. Before this happens, the capital loss must offset any capital gains in that current year. Then you may use up to $3,000 of capital losses to offset your ordinary income. If you have capital losses that are beyond that $3,000 for the year, then you have the option of carrying forward the losses to another year.
Offsetting Future Gains
- When you carry forward a short-term loss, it can help you offset future capital gains. When offsetting capital gains, you must offset the type of capital gain that corresponds with the loss first. For example, if you have a short-term capital loss, you must use it to offset short-term capital gains first. Then if you have any remaining short-term capital losses, you may use them to offset long-term capital gains. As long as all of the applicable matching gains have been offset, the IRS allows you to offset other types of capital gains.
- When offsetting capital gains, you simply must apply the losses in the correct fashion to take advantage of the tax break. If you use short-term capital losses to offset long-term gains, you are actually using something with a higher tax rate to offset something with a lower tax rate. If you have long-term capital losses, you may also use those to offset short-term capital gains as long as you apply the losses correctly on your taxes.