A capital loss is the loss realized when a capital asset is sold or exchanged for less than its adjusted basis. It is a short-term capital loss if the asset was held for not more than 1 year and a long-term capital loss if it was held for more than 1 year, in each case if and to the extent the loss is taken into account in computing taxable income (26 U.S.C. 1222(2) and (4)). That label is not cosmetic. It sets which gains the loss nets against and, for a taxpayer other than a corporation, the character it keeps when it carries to the next year. Whether the taxpayer is a corporation is a separate question, and that is the one that decides how much of the loss is allowed at all.
How the Amount Is Figured
The amount is one subtraction. The loss from a sale or other disposition of property is the excess of the adjusted basis provided in section 1011 for determining loss over the amount realized, and the amount realized is the sum of any money received plus the fair market value of any property other than money received (26 U.S.C. 1001(a) and (b)).
Adjusted basis is where that subtraction gets its starting point, and the line between a decline you are still holding and a loss you have actually realized is set out in unrealized gain or loss.
The holding period decides the label, and it is counted a particular way: begin counting on the day after you received the property and include the day you disposed of it (IRS, Instructions for Form 8949 (2025)).
The Terms Section 1222 Defines
Three further terms sit above the raw loss, and the statute defines each one separately.
Net short-term capital loss is the excess of short-term capital losses for the taxable year over short-term capital gains for that year. Net long-term capital loss is the same excess measured on the long-term side (26 U.S.C. 1222(6) and (8)).
Net capital loss is the term that actually carries, and it is defined against the limit rather than against the gains. It means the excess of the losses from sales or exchanges of capital assets over the sum allowed under section 1211, and for a corporation, amounts that are short-term capital losses under section 1212(a)(1) are excluded in determining it (26 U.S.C. 1222(10)).
How Much Capital Loss Can You Claim?
Losses from sales or exchanges of capital assets are allowed only to the extent allowed in sections 1211 and 1212 (26 U.S.C. 165(f)). Section 1211 then splits along entity type.
In the case of a corporation, losses from sales or exchanges of capital assets are allowed only to the extent of gains from such sales or exchanges (26 U.S.C. 1211(a)). There is no allowance against ordinary income in that sentence at all. A corporation with no capital gains for the year deducts none of its capital loss, however large the loss is.
For a taxpayer other than a corporation, the same gains-first rule applies, plus, if the losses exceed the gains, the lower of $3,000 ($1,500 in the case of a married individual filing a separate return) or the excess of the losses over the gains (26 U.S.C. 1211(b)).
Carrybacks and Carryovers
A corporation can send an unused loss backwards as well as forwards, and both windows are fixed by statute. An individual only carries it forward.
A corporation’s net capital loss is a capital loss carryback to each of the 3 taxable years preceding the loss year and a capital loss carryover to each of the 5 taxable years succeeding it, and it is treated as a short-term capital loss in each of those years whatever its original character (26 U.S.C. 1212(a)(1)). The carryback is allowed only to the extent it does not increase or produce a net operating loss for the year it is being carried back to (26 U.S.C. 1212(a)(1)(A)(ii)), and the entire amount goes to the earliest year the loss can reach before any of it moves further out (26 U.S.C. 1212(a)(1)). A loss sustained by reason of a foreign government expropriating or seizing property is the exception: that portion carries forward to each of the 10 taxable years succeeding the loss year and cannot be carried back (26 U.S.C. 1212(a)(1)(C) and (a)(2)(A)).
A regulated investment company’s own net capital loss sits outside that rule. Section 1212(a)(1) does not apply to it, the excess of the net short-term capital loss over the net long-term capital gain arises as a short-term capital loss on the first day of the next taxable year, and the excess of the net long-term capital loss over the net short-term capital gain arises as a long-term capital loss on that same day (26 U.S.C. 1212(a)(3)(A)). The IRS tells the preparer there is no limit on the number of tax years a regulated investment company is allowed to carry a net capital loss forward (IRS, Instructions for Schedule D (Form 1120) (2025)).
Schedule D (Form 1120) shows the character conversion for a corporation that is not a regulated investment company: the unused capital loss carryover is entered at line 6, which sits inside Part I, Short-Term Capital Gains and Losses (IRS, Schedule D (Form 1120) (2025)).
An individual keeps the character instead. The excess of the net short-term capital loss over the net long-term capital gain becomes a short-term capital loss in the succeeding taxable year, and the excess of the net long-term capital loss over the net short-term capital gain becomes a long-term capital loss in the succeeding taxable year (26 U.S.C. 1212(b)(1)). The two arrive on separate lines of the next return, short-term at line 6 and long-term at line 14 (IRS, Schedule D (Form 1040) (2025)). If part of the loss is still unused after that year, it carries over to later years until it is completely used up (IRS, Publication 550 (2025)).
Working a Carryforward on Stated Numbers
The individual allowance is not spread across the two buckets. It is treated as a short-term capital gain in the loss year, so it consumes the short-term bucket before it reaches the long-term one (26 U.S.C. 1212(b)(2)). Say an individual whose taxable income is comfortably above the allowance has this year:
Short-term capital gains 4,000
Short-term capital losses (9,000)
Net short-term capital loss (5,000) Schedule D line 7
Long-term capital gains 1,000
Long-term capital losses (3,000)
Net long-term capital loss (2,000) Schedule D line 15
Combined (7,000) Schedule D line 16
Allowed against other income (3,000) Schedule D line 21
Carried to the next year 4,000
Short-term carryforward 5,000 less 3,000 = 2,000 Schedule D line 6
Long-term carryforward 2,000 Schedule D line 14Line 21 takes the smaller of the loss on line 16 or $3,000, or $1,500 for a married individual filing separately (IRS, Schedule D (Form 1040) (2025)). The deemed short-term gain then runs against the net short-term capital loss and leaves the remainder short-term, while the net long-term capital loss reaches next year untouched. That ordering is what lines 8 and 13 of the Capital Loss Carryover Worksheet compute (IRS, Instructions for Schedule D (Form 1040) (2025)).
Where the Loss Lands on the Return
Sales and exchanges of capital assets are listed transaction by transaction on Form 8949, short-term in Part I and long-term in Part II, and Form 8949 is filed with the Schedule D for the return being filed (IRS, Instructions for Form 8949 (2025)). Schedule D figures the overall gain or loss from what Form 8949 reported, and it is also where a capital loss carryover from the previous tax year enters the current one (IRS, Instructions for Form 8949 (2025)).
A corporation runs the same order. Every applicable line of Form 8949 is completed before lines 1b, 2, 3, 8b, 9 or 10 of Schedule D (Form 1120), because those lines are the Form 8949 totals (IRS, Instructions for Schedule D (Form 1120) (2025)).
What Are Considered Capital Losses?
A capital loss comes from the sale or exchange of a capital asset, and the statute defines that term by subtraction: property held by the taxpayer, whether or not connected with his trade or business, but not the classes of property it goes on to name (26 U.S.C. 1221(a)). Which classes those are is set out in capital assets. The event that triggers the loss is a sale or other disposition.
Two things that are not sales are treated as sales anyway. A security that is a capital asset and becomes worthless during the taxable year produces a loss treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset (26 U.S.C. 165(g)(1)). A nonbusiness bad debt must be treated as a short-term capital loss, whatever the age of the debt (IRS, Instructions for Form 8949 (2025)).
What Gets Mistaken for a Deductible Capital Loss
Personal-use property is the first one, and the rule that reaches it does not sit in the capital gains subchapter at all. For an individual, the deduction for a loss is limited to losses incurred in a trade or business, losses incurred in any transaction entered into for profit though not connected with a trade or business, and, except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit if such losses arise from fire, storm, shipwreck, or other casualty, or from theft (26 U.S.C. 165(c)). A boat or a vacation home sold at a loss fits none of those, and the IRS says it flatly: loss from the sale or exchange of a capital asset held for personal use is not deductible (IRS, Instructions for Schedule D (Form 1040) (2025)). The property is still a capital asset, and a gain on it would generally be a capital gain, so what the rule withholds is the deduction rather than the label (IRS, Instructions for Schedule D (Form 1040) (2025)).
A loss on the sale of personal property generally should not be reported on Form 8949 at all, and an information return is what changes that (IRS, Instructions for Form 8949 (2025)). Where a Form 1099-S was received for real estate held for personal use, the transaction must be reported on Form 8949 even though the loss is not deductible (IRS, Instructions for Schedule D (Form 1040) (2025)).
Where a Form 1099-K reports proceeds from a sale of personal property that produced a loss, the loss is reported with an offsetting entry, either in the entry space at the top of Schedule 1 or on Form 8949 (IRS, Instructions for Form 8949 (2025)). Taking the Form 8949 route, the preparer enters L in column (f) as the code explaining that the loss is nondeductible, then enters the nondeductible amount as a positive number in column (g), which is the adjustment that results in $0 as the gain or loss in column (h) (IRS, Instructions for Form 8949 (2025)).
Depreciable business property is the second one. Property used in a trade or business of a character subject to the allowance for depreciation, and real property used in a trade or business, are outside the capital asset definition (26 U.S.C. 1221(a)(2)). Whether the loss enters the section 1231 netting then turns on how long the property was held.
Where that property was held for more than 1 year it is property used in the trade or business (26 U.S.C. 1231(b)(1)), so a loss on it is netted against the year’s gains of the same kind before anything reaches Schedule D (26 U.S.C. 1231(a)). Where it was held for 1 year or less it never enters that netting, because the definition the netting runs on does not reach it (26 U.S.C. 1231(b)(1)). What that netting produces, and when it turns ordinary, is worked through in section 1231.
A wash sale is the third. Where a loss is claimed on a sale or other disposition of shares of stock or securities and, within a period beginning 30 days before the date of that sale and ending 30 days after it, the taxpayer acquired substantially identical stock or securities by purchase or by an exchange on which the entire amount of gain or loss was recognized by law, or entered into a contract or option so to acquire them, no deduction is allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of that business (26 U.S.C. 1091(a)).
A sale or exchange between certain related parties is the fourth. The IRS names the pairs it reaches, among them members of a family, a grantor and a fiduciary of a trust, and a corporation together with an individual who directly or indirectly owns more than 50% of the corporation’s stock, that last pair unless the loss is from a distribution in complete liquidation of a corporation (IRS, Instructions for Schedule D (Form 1040) (2025)). A transaction that results in one of these nondeductible losses is reported on Form 8949 with the same code L in column (f) (IRS, Instructions for Schedule D (Form 1040) (2025)).
A firm that wants the disposition workpapers and the carryover schedules behind these calls prepared and reviewed before anything client facing depends on them can put a real block of that work through a trial task.
