Documenting capital loss carryforwards

[Delawaredave5]

Friend had a large LT capital loss in 2006. Used some of the loss in 2007. Never used or needed the remaining loss since then.

Now he will have a capital gain this year - and wants to use 2006 loss remaining. Reading Schedule D instructions, appears the loss can be carried forward indefinitely.

QUESTION: He made no documentation of the "available carry forward" on 2008 through 2014 tax returns (because wasn't needed).

Is this a problem ? I'm not sure if there was something he should have done. The Schedule D instructions have a "Capital Loss Carryover Worksheet" - but this says "Keep for your records". Hopefully just the old return and supporting documentation is sufficient.

Thanks for any thoughts. I'll post over at Fairmark too.

http://www.irs.gov/pub/irs-pdf/i1041sd.pdf

 

[jebmke]

The old return and the worksheet should be sufficient. Of course, you still need to source documents that support the original loss. Trade confirmations are good but a statement that shows the trades will suffice. Going forward, a 1099B should be enough for covered securities.

 

[Texas Proud]

Was he taking the $3K deduction per year?


I am not quite sure of your question though... he should have been putting down the loss on every tax return in order to carry it forward to the next year... I do not think you can have a loss in 2006/07 and do nothing until today and then claim that loss carry forward...


But as always, the IRS rules apply and they are the source that is needed...


Edit to add... you put the instructions for a estate or trust... is this one? Or is it an individual?

 

[pb4uski]

Agree with TP. Your friend should have been taking $3k a year against ordinary income (assuming he had $3k of ordinary income) so the loss carryforward will be lower today than the last time he touched it. As I recall, if he didn't take it then he loses it but it does reduce the loss caryforward, but he could amend his recent returns and claim it and get a refund.

The $3k reduction would also apply to a trust and would just pass forward to trust beneficiaries in the K-1.

 

[Texas Proud]

I think that the loss is lost.... from the IRS..

Capital loss carryover. If you have a total net loss on line 16 of Schedule D (Form 1040) that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up. When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it and whether or not you filed a return for the current year. When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains.


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If the person did not carry over the loss on their tax return.... and continue to do so every year, then there is nothing to carry over for this years taxes... IOW, you are supposed to look to last years tax return for the loss carryover.... if nothing was put down on that return then I would suggest the IRS would say the person elected not to carry over that loss so they lose it...

And we are talking 7 years here.... so he cannot go back and amend to get it back...


Hope someone can come up with info showing this is wrong.....

 

[pb4uski]

Technically you may be right, but if it were me I would just reduce the loss carryover by $3k a year and use any that is left over and take my chances with the IRS.

That is one of the beauties of tax software, it does the carrying forward and the use of the $3k a year for you.

 

[kaneohe]

As others have said , you are supposed to "use" the loss carryforward every year, first against CG , then against ordinary income. However "use" is different from "lose". If your income is low enough, you may only lose a part of the 3K or possibly even none of it. This will result from filling out the loss carryforward wksht. which should be done every year regardless of whether or not you file.

The discussion in this link is about minors but it applies in general:
http://www.fairmark.com/college/kidtax/minorcarryover.htm

 

[Texas Proud]

As others have said , you are supposed to "use" the loss carryforward every year, first against CG , then against ordinary income. However "use" is different from "lose". If your income is low enough, you may only lose a part of the 3K or possibly even none of it. This will result from filling out the loss carryforward wksht.

It has been many decades since I was a tax accountant... but I do remember that there were elections that you need to make every year in order to keep something going forward.... if you failed to put something down, then you were considered to not have elected it... so in this situation, if you did not put down the loss carry forward on the 2008 tax return, you 'elected' not to carry it forward at all... hence, you lose it as an option in 2009 (unless you go back and fix 2008)....


However, if it were really large.... I would be like pb4uski and put it down... but I would also document the heck out of it... I would put in a schedule showing the loss carry forward for 2008, then show the reduction of each year on a separate line going into 2014... and then use that number to put into the 2015 tax form... I would not just pop the number in 2015 and hope for the best... it is too easy for them to look at last years return and see nothing there... at least have an explanation that someone can look at....


The problem I see is that I bet a computer will do the review and not see that schedule.... but when every you do get a person to look at least you can show you did not pull it out of the sky....

 

[Delawaredave5]

Thanks for comments !

1. There is no trust involved

2. He could have been taking $3k each year, but didn't. Only had a small amount of SS, didn't pay taxes anyhow.

He used Turbotax each year, but I think in 2008 used "1040 EZ" and TT didn't carry information over ?

I think the IRS requires that the $3k get used each year before the personal exemption, see below link. So the IRS might say $3k should have been taken in each of years 2008 to 2014, 7 years, $21k.

But even if he takes $21k off the past losses, there's "still a pile" of past losses he'd like to use against expected 2015 gain.

The question is would unused losses be disallowed because he neglected to show the carryforward on 2008 to 2014 returns ?

The loss is there, well documented originally. He could go back and file amended returns (but only last 3 years, right ?)

https://ttlc.intuit.com/questions/2...carryforward-even-if-i-have-no-taxable-income

 

[kaneohe]

a similar thread at fairmark.com: my interpretation......a weak consensus that you don't have to file but it's safer to do so. You still need to do the loss carryover wksht every yr.

Fairmark Forum :: Capital Gains and Losses :: capital loss carryover

from p.69 of Pub 550: (suggests you don't have to file to retain the loss carryover
but must have done every yrs loss wksht to figure out carryover to next yr)
When you figure the amount of any capital
loss carryover to the next year, you must take
the current year's allowable deduction into account,
whether or not you claimed it and
whether or not you filed a return for the current
year

 

[kaneohe]

I think the IRS requires that the $3k get used each year before the personal exemption, see below link. So the IRS might say $3k should have been taken in each of years 2008 to 2014, 7 years, $21k.

But even if he takes $21k off the past losses, there's "still a pile" of past losses he'd like to use against expected 2015 gain.

Please note that although $3K must be "used" each yr , it is possible that none of it gets lost so that the total loss carryover may decrease by less than 3K/yr .....possibly it may not change at all............depends on income. Very low income will result in no reduction at all.

 

[Texas Proud]

a similar thread at fairmark.com: my interpretation......a weak consensus that you don't have to file but it's safer to do so. You still need to do the loss carryover wksht every yr.

Fairmark Forum :: Capital Gains and Losses :: capital loss carryover

from p.69 of Pub 550: (suggests you don't have to file to retain the loss carryover
but must have done every yrs loss wksht to figure out carryover to next yr)
When you figure the amount of any capital
loss carryover to the next year, you must take
the current year's allowable deduction into account,
whether or not you claimed it and
whether or not you filed a return for the current
year

Interesting reading.... but, on that same pg 69 the sentences in the capital loss carry forward worksheet is:
1.

• Enter the amount from Form 1040, line 41. If a loss, enclose the amount in parentheses
• Enter the loss from Schedule D, line 21, as a positive amount

If you did not file a return with the information, then the numbers are zero...


Again, if we are talking big numbers here.... I would put down the carry over loss and hope for the best...

 

[Delawaredave5]

a similar thread at fairmark.com: my interpretation......a weak consensus that you don't have to file but it's safer to do so. You still need to do the loss carryover wksht every yr.

Fairmark Forum :: Capital Gains and Losses :: capital loss carryover

from p.69 of Pub 550: (suggests you don't have to file to retain the loss carryover
but must have done every yrs loss wksht to figure out carryover to next yr)
When you figure the amount of any capital
loss carryover to the next year, you must take
the current year's allowable deduction into account,
whether or not you claimed it and
whether or not you filed a return for the current
year

Awesome help ! Looks like $3k/year of loss carryforward should have been taken for each of 7 years, $21k (2008-14)

Four of those years cannot be amended (2008-2011) and I'm assuming $12k of "losses lost".

Three years can be amended (2012-2014) and should show the $3k carryforward against ordinary income.

I don't know size of original loss, but big. Say it was $100k, then we are assuming / hoping that $79k of losses remain and could be used against 2015 long term capital gain ?

 

[pb4uski]

Yes, but your friend may want to consult with a CPA in tax practice who deals with the IRS on this sort of thing regularly to see the best way forward. It might cost a little, but there may be something they can do that would increase the likelihood of the losses being ok to use.

 

[kaneohe]

I think that the loss is lost.... ........ IOW, you are supposed to look to last years tax return for the loss carryover.... if nothing was put down on that return then I would suggest the IRS would say the person elected not to carry over that loss so they lose it...

..............................


Hope someone can come up with info showing this is wrong.....

I would suggest the opposite........let the IRS show where not claiming some of the loss invalidates all of it. I think they don't want you tinkering with the timing of the loss so you have to treat it as you should as if you had filed correctly (and lose that part if it is to old to amend) but losing all of the loss seems rather draconian, even for the IRS.

 

[Texas Proud]

I would suggest the opposite........let the IRS show where not claiming some of the loss invalidates all of it. I think they don't want you tinkering with the timing of the loss so you have to treat it as you should as if you had filed correctly (and lose that part if it is to old to amend) but losing all of the loss seems rather draconian, even for the IRS.

As you can see from my other posts... that is what I suggest...

Put it down and have them come back and tell you it is not correct... I would think that this is not fraud since you are claiming something that was valid if things had been done right... not like excluding to put down real income... which can be considered fraud....


However, I still think that the way the form etc. is written he would not get it... BUT, it is not the rules that matter... it is the laws first and then regulations... that is where a CPA to currently does tax work would be a big help... or, a tax attorney if you want to get 'more sure'....