5.4 Capital Losses and Carryovers

Capital losses are fully deductible against capital gains on Schedule D, and if losses exceed gains, you may deduct the excess from up to $3,000 of ordinary income on Form 1040. Net losses over $3,000 are carried over to future years. On a joint return, the $3,000 limit applies to the combined losses of both spouses (5.5). The $3,000 limit is reduced to $1,500 for married persons filing separately.

Filing Tip

Keep Records of Loss Carryovers

If you have capital losses for 2012 in excess of the deductible limit, keep a copy of your 2012 Form 1040 and Schedule D to figure your loss carryover when you file your 2013 Schedule D. IRS Publication 550 for 2012 and the 2013 Schedule D instructions will have a worksheet you can use to figure your loss carryovers from 2012 to 2013.

- - - - - - - - - -

Although qualified dividends (4.1) for 2012 are subject to the same rates as 2012 net capital gains, such dividends are not reported as long-term gains on Part II of Form 8949 or Schedule D and thus are not offset by capital losses in determining whether you have net capital gain or loss for 2012.

In preparing your 2012 Schedule D, remember to include any capital loss carryovers from your 2011 return. Short-term carryover losses are entered on Line 6 of Part I and long-term carryover losses are entered on Line 14, Part II. Use the carryover worksheet in the 2012 Schedule D instructions for figuring your short-term and long-term loss carryovers from 2011 to 2012.

Losses from wash sales not deductible.

You cannot deduct a loss from a wash sale of stock or securities unless you are a dealer in those securities. A wash sale occurs if within 30 days before or after your sale at a loss, you acquire substantially identical securities or purchase an option to acquire such securities (30.6).

Report a wash sale on Schedule D on Line 1 (short-term) or Line 8 (long-term) capital gains and losses, and directly below the entry, identify the transaction as a “wash sale” in column (a) and in column (f) enter the disallowed loss as a positive amount.

Death of taxpayer cuts off carryover.

If an individual dies and on his or her final income tax return net capital losses, including prior year carryovers, exceed the $3,000 or $1,500 limit, the excess may not be deducted by the individual’s estate. If the deceased individual was married, his or her unused individual losses may not be carried over by the surviving spouse (5.5).