Can I carryover an investment capital loss?

April, 28 2021 by Jean Lee Scherkey, EA

I had investment capital losses over 17,000 dollars for the 2020 tax year, yet my Schedule D is only allowing $3,000 loss? Will the $14,000+ in losses be a capital loss carryover on my next income tax returns for following years?

-Mary Ellen



Dear Mary Ellen,

There is a reason why the saying “back to the coal mine” has stood the test of time. Whether it is investments or the nine to five grind, all of us are working in some type of mine, hoping that our efforts will harvest a financial bounty. But, when our endeavors become unprofitable, we look to make lemonade out of lemons and salvage what we can. When the losses on the sale of capital assets, such as stocks, investment property, and cryptocurrency are larger than the reported gains for the tax year, a taxpayer may only deduct up to $3,000 of these losses a year on their tax return. Any remaining losses are carried forward to the next tax year. Here is an example.

The $50,000 Benny Factor inherited in 2017 from his uncle was burning a hole in his pocket. He used his newfound fortune to buy stock in a chain of tanning salons opening in Death Valley, California. Two years later, his investment dried up, and the tanning salons closed their doors for good. Benny reported a $50,000 loss on his 2019 tax return. He had no other capital gains or losses to report. Due to the capital loss limitation, Benny could only claim a $3,000 loss on his 2019 individual income tax return. The remaining $47,000 in losses will carryforward to his 2020 tax return.

Referring to the example above, if Benny had no other investments to offset his capital loss carryover, it would take close to fifteen years for Benny to deduct all of the loss he generated from his worthless investment. Not even getting ketchup out of a new glass bottle takes that long. What if there was some way for Benny to harvest those losses and save some considerable tax?

Although he was his uncle’s only nephew, Benny was convinced that he was his uncle’s favorite. Several years ago, Benny was gifted a large plot of pastureland in Michigan by his uncle. In 2020, Benny received an offer he could not refuse and received a $60,000 gain on the sale. Now he is dreading the hefty tax he will owe Uncle Sam. When Benny prepared his 2020 return, instead of paying tax on a $60,000 gain, he harvested the $47,000 capital loss carryover from 2019 and reduced his taxable gain to $13,000 ($60,000 - $47,000 = $13,000). Oh, what joy!

There is nothing fun about having a loss on an investment, especially when we have worked hard to excavate the rewards. After all, we want to acquire enough wealth to live comfortably and help others less fortunate. However, when you can harvest those losses and turn them into tax savings, your financial future can look a little brighter.

Wishing you a bountiful harvest in all of your efforts and many happy returns,

Jean