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Long term capital loss carryforward, understanding correctly ?
Old 07-27-2015, 07:09 AM   #1
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Long term capital loss carryforward, understanding correctly ?

Read a dozen website, including below and searched the board.

Question: Long term capital losses can be carried forward and used in future years against long term gains. There's no limit to the amount of carry forward that can be used against future long term gains ? Correct

The $3,000 maximum referenced below is only when long term losses are used against regular income - for that there's a $3,000 annual maximum.

Tax Topics - Topic 409 Capital Gains and Losses

So if a person had:

2014: $40k long term loss, $5k long term gain, $20k W2 income
2015: $15k long term gain, no losses, $20k W2 income
2016: $10k long term gain, no losses, $20k W2 income

Then:
2014: $5k of LT loss offsets $5k gain, $3k LT losses offsets $3k W2 income
($32k of losses left after this)

2015: $15k of LT losses offsets $15k gain, $3k LT losses offsets $3k W2 income ($14k losses left after this)

2016: $10k of LT losses offsets $10k gain, $3k LT losses offsets $3k W2 income ($1k losses after this)

Sorry if I'm stupid.... thanks !
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Old 07-27-2015, 07:42 AM   #2
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looks good to me.
Try throwing in ST gains/losses for your next exercise
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Old 07-27-2015, 07:44 AM   #3
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Old 07-27-2015, 07:47 AM   #4
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Quote:
Originally Posted by Delawaredave5 View Post
Question: Long term capital losses can be carried forward and used in future years against long term gains. There's no limit to the amount of carry forward that can be used against future long term gains ? Correct

The $3,000 maximum referenced below is only when long term losses are used against regular income - for that there's a $3,000 annual maximum.... [stuff deleted]
You are correct and your example if also correct.
Do note that you can carry forward not just long term loss but also short term loss. And, any carry forward loss offsets both long term and short term gains before being applied to ordinary income. There is no limit to how much gains can be offset by carry forward losses.
If you have access to a tax software, try it out and see how it works.
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Old 07-27-2015, 09:41 AM   #5
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$1K loss remaining after the 3 years according to my calculation.

-gauss
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Old 07-27-2015, 03:39 PM   #6
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Your calculations are correct, but for planning purposes please keep in mind that the $3,000 capital loss deduction against ordinary income is generally more valuable than the dollar for dollar offset vs. LTCG. Starting with a $40,000 loss, you could potentially enjoy the $3,000 deduction for over a decade. Instead, you are steadily realizing LTCG and find your $3,000 deduction has almost disappeared after only three tax years. If I were in this situation, I would look into ways to delay realizing capital gains for as many years as possible, thus stretching the $3,000 deduction for as long as possible. In my case, I would probably finance my retirement almost exclusively through taxable 401k distributions to avoid realizing the capital gains.
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