My question is about using a capital-loss carryover when one has no capital gains.
If a taxpaper has no capital gains in a given year, but has available $20,000 in a capital-loss carryover from the previous year, is the taxpayer required to do the $3,000 subtraction from the cap-loss carryover, in order to keep the carryover alive for the following years?
What if one does not use the carryover–would it be forfeited?
Naturally, ideally the taxpayer would conserve the cap-loss to use only when needed–but it doesn’t appear to work that way, correct?
The $3000 limit on a capital loss carry forward is the amount you can use for ordinary income. If you have any capital gains, then you can offset the entire amount of capital gains plus use $3000 more.
You don’t get to pick and choose when to use your capital loss carryover or how much of it to use.
On page 9 of the 2012 Schedule D instructions (pdf) is the 2011 to 2012 capital loss carryover worksheet. Don’t wing it: fill out the worksheet. That is the amount you must enter on Schedule D. If you don’t, that’s still the amount that the IRS will consider you to have entered.
The reason I’m not giving you a more straightforward answer is because you didn’t mention whether you had a capital loss in the given year, even though you said you had no capital gain. Also, in some very low income situations, you may find yourself having to put a $3000 loss on line 13 of Form 1040, but you may not actually be “using up” $3000 in capital losses. So fill out the worksheet.
I know that a lot of people would like to postpone taking the carryover loss until a year when they are in a higher tax bracket, but that is not an option.
Just to elaborate: For all practical purposes, the entire amount of the capital loss carryover (not just $3000) is treated as if it were a new capital loss that occurred in the immediately following year. You should use the capital loss worksheet in the Schedule D instructions to properly determine the amount of the carryover and to determine how much of it is long term or short term. (In some situations, you could be pleasantly surprised.)
Thx for replies–I did fill out the worksheet, which gave the $3,000 figure to enter on Schedule D. But because I had no capital gains, and very little income [less than $3,000], some of this $3,000 seems “wasted.” With or without this $3,000 in loss, I owe no tax. So naturally, I’m wondering if I am required to use this $3,000 even though I owe no tax with or without using the available $3,000.
I’ve read conflicting info about this–some tax filers do not carry over the loss because they didn’t need to if they owe no tax.
But if the capital loss is not carried over because one owes no tax, is the available carryover then “forfeited” for future use?
I don’t have anything definitive but I’d encourage you to explore it further. I think there is a distinction between having no taxable income and owing no tax (perhaps due to credits).
Thx–I guess this answers my Q–Having no additional cap losses and near-zero income, I’m still forced to use the $3k loss–I did the worksheet and it tells me to put the $3k loss on 1040-line13.
I just wanted to be sure that the taxpayer must use the $3k, regardless of whether they need to, regardless of whether it reduces their liability–which is my case. That is, the taxpayer can’t just ignore the available carryover until they need it.
I researched this, and believe it or not, even some tax preparers are not clear about this–there’s contradictory advice.
Here’s a more general question, related to my original Q:
I might be in a situation where I’m filing a return unnecessarily.
I’m filing only because I had a very small capital gain resulting from a mutual fund company selling fractional shares in three funds to cover $20 in annual expenses for each of the three funds.
My understanding is that one must file a return if there are any capital gains at all.
For example, some years ago I sold fund shares totalling $20,000. Only about $2,000 of the gross $20,000 received was capital gains. I did all the worksheets, and the result was I owed no tax, so I didn’t file. A few yrs later, I recvd an IRS letter asking why I didn’t file. The IRS received ONLY the info that I had received $20,000 gross–they had NO info re basis, hence no knowledge of how much of the $20k was cap gains. So they thought I’d had a clear $20,000 that I didn’t report.
So I’ve been filing every year, even though owing no tax, if I have even small cap gains, ie this year under $20.
[I know that as of this year, the IRS is receiving basis info from fund companies for shares purchased after 01/01/2012.]
So I’m wondering: Do I even need to file? If not, what would happen to the capital loss carryover amount I still have? Do I need to file to keep this carryover “alive”?
If you don’t file, the carryover doesn’t disappear, but still gets reduced by $3,000 as though you’ve filed the tax return and claimed it.
Here’s some relevant info from a court case (pdf):
(Bolding mine)
If you don’t file, it might be more difficult for you to later prove how much carryover you still have left, so it would be better to just file the tax return.
These rules are similar to the allowed vs. allowable rules for depreciation. Even if an asset was not depreciated, when it’s sold the basis is still reduced by the amount of depreciation that could have been claimed.
ok11, looks like you nailed it–definitive and dispositive.
Do I understand correctly?:
If one has a capital-loss carryover amount >$3,000, the amount of capital-loss carryover is reduced by $3,000, whether or not a return is filed, whether or not any of the allowable $3,000 is needed or used.
I wish to HELL the IRS would put this info up front–I read a thread by tax preparers with contradictory opinions.
So an advantage of filing a return even if not required to, is to create a clear year-by-year IRS record, which would make relevant info easily discoverable if any personal tax questions ever arise–just check your copied/saved returns, which will include every year’s carryover amount.
Right, I really shouldn’t have written that $3,000 figure.
No, sorry for the oversimplification in my previous post.
Let’s say you had a current year stock sale of $150, and a carryover capital loss of $4,150. Also, to keep it simple let’s assume that even if you deducted $3,000 of capital losses your line 41 would be zero or more.
If you don’t file a tax return, then the IRS could argue that your carryover loss to the next year is $1,000, because you would have used $150 of the carryover to offset your capital gain and $3,000 against ordinary income. Since the IRS doesn’t know the basis, it would treat the entire amount of stock sales proceeds as a capital gain.
Of course, you could then verify the basis of the sale to the IRS. If the basis was $200, then your carryover capital loss to the next year would be $1,200 (current year loss of $50 + $4,150 of prior year losses - $3,000 that could have been used against ordinary income).
This too is an oversimplification, because it assumes that your filing status is not married filing separately (in which case capital loss deduction is limited to $1,500 instead of $3,000).
As I mentioned in my first post, people get confused by the fact that you have to put a $3000 loss on line 13 of From 1040 and assume that $3000 of their carryover amount has been used up. This is NOT the case. This is why I say to use the worksheet and not try to wing it. Even though the 2011 to 2012 carryover worksheet told you to put $3000 on line 13, next year when you fill out the 2012 to 2013 worksheet, you will be surprised to find that you did not use up $3000 of carryover if your 2012 income is very low.
First you must use up any capital loss carryover against any capital gains. That includes capital gains distributions from mutual fund shares.
As for what remains after offsetting gains against losses, if you want the gory details: Take your income after deductions, but before exemptions (line 41 of Form 1040), add back the amount on line 13 (the capital loss) as if it were a positive number. If this number is less than or equal to zero, no more of your capital loss has been used up. If this number is less than $3000, then only this part of your capital loss has been used up, despite the fact that it says $3000 on line 13.
This is complicated to remember, use the worksheet.
As I mentioned in my first post, people get confused by the fact that you have to put a $3000 loss on line 13 of From 1040 and assume that $3000 of their carryover amount has been used up. This is NOT the case. This is why I say to use the worksheet and not try to wing it. Even though the instructions told you to put $3000 on line 13 of your 2012 form 1040, next year when you fill out the 2012 to 2013 worksheet, you will be surprised to find that you did not use up $3000 of carryover if your 2012 income is very low.
First you must use up any capital loss carryover against any capital gains. That includes capital gains distributions from mutual fund shares.
As for what remains after offsetting gains against losses, if you want the gory details: Take your income after deductions, but before exemptions (line 41 of Form 1040), add back the amount on line 13 (the capital loss) as if it were a positive number. If this number is less than or equal to zero, no more of your capital loss has been used up. If this number is less than $3000, then only this part of your capital loss has been used up, despite the fact that it says $3000 on line 13.
This is complicated to remember, trust the worksheet.
As I tried to explain above, you do not automatically use up $3000 a year. The amount could be smaller, especially if we are getting into the territory where you might not be required to file a return. But to calculate the amount that you DID use up, you have to go to all the same trouble it would take to actually fill out a return. And if you go to the trouble of filling out a return, you might as well file it to get the statute of limitations running in your favor. (There is no statute of limitations if you don’t file. The IRS could theoretically hound you until the day you die at which point they could hound the administrator of your estate.)
I doubt that the worksheet told you to enter $3000 on Schedule D. (The Schedule D instructions might have told you to enter a $3000 loss on Form 1040.) The worksheet should have told you to enter a total of $22000 in losses on Schedule D, split between long term and short term. Remember, you are carrying over the entire $22000 capital loss to your 2012 return, even though you may end up using only a small part of it.
“I doubt that the worksheet told you to enter $3000 on Schedule D. (The Schedule D instructions might have told you to enter a $3000 loss on Form 1040.)”
What I meant: on line 21 of Part III of Schedule D, it says “enter [$3k] here and on 1040-line 13.”
I may have discovered an error I’ve made on previous returns:
1040-line 41 says to “subtract line 40 from line 38.”
In previous years, if subtracting line 40 from line 38 gave a negative number, I did not enter the negative number on line 41–instead I entered zero.
But I should have entered the negative number, correct?
Please bear with me–I’m slow to begin with, and after reading IRS+Lasser tax instructions, my mind = sludge.
What/where is the effect of entering a negative number on 1040-line41, instead of entering zero? Where/how does this impact subsequent calculations?
I’ve read each subsequent line on 1040, and the only operation that includes line 41 occurs on line 43: “Subtract line 42 from line 41. If line 42 > line 41, enter zero.”
In other words, if the result of subtraction: line41 minus line 42 is less than zero, enter zero.
So what’s the effect of entering the correct negative number on line 41, instead of zero?
For your specific case: When you fill out thecapital loss carryover worksheet the following year, you will see that the first question is what was on line 41 the previous year. Then when you follow through with the calculations on the capital loss carryover worksheet, the result will be that you did not use up a whole $3000 worth of carryover capital losses, despite the fact that line 13 of form 1040 said ($3000).
For example, let’s say line 41 of Form 1040 is ($100) but line 13 is ($3000). You did not use up $3000 worth of carryover capital losses. You only used up $2900.
You are right that by the time you get to line 43 of Form 1040, you will enter a 0 there and the value on line 41 won’t affect the rest of the form. But the negative number on line 41 is needed to calculate how much carryover you have available for the next year.