Though the Internal Revenue Service might not write you a check in the amount of your losses, it does allow you to use them to offset your gains. If you’ve had a particularly bad year in which you lost more than you gained from selling capital assets, you can take a deduction for some of all of the excess losses. If the excess losses exceed the deduction limit, you can use those losses in future tax years to offset later gains. However, if you’re selling personal property, like your car or your house, you can’t use those losses.
Divide your capital losses for the year into short-term losses and long-term losses. Short-term losses come from selling assets you’ve held for one year or less. Long-term losses come from selling assets you’ve held for more than one year.
Offset your short-term losses with any short-term gains. For example, if you have $7,000 in short-term losses and $3,000 in short-term gains, you have a net $4,000 short-term loss.
Offset your long-term losses with any long-term gains. For example, if you have $9,000 in long-term losses and $2,000 in long-term gains, you have a net $7,000 long-term loss.
Offset your net long-term and short-term gains and losses, if necessary. In this example, since both are losses you won’t offset them. However, if you had $5,000 in long-term gains and $6,000 in short-term losses, you would have a net $1,000 short-term loss.
Reduce your losses by $3,000 ($1,500 if married filing separately) because that amount is used as a tax deduction in the current year to figure your capital loss carryover. Always use short-term losses for the deduction before long-term losses. If you are single and have $4,000 of short-term losses and $7,000 of long-term losses, use $3,000 of the short-term losses as your deduction leaving you with $1,000 of short-term losses and $7,000 of long-term losses to carry over to the next year.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."