The rule
IRS Topic 409 limits the deduction for a net capital loss to $3,000 a year, or $1,500 if you are married filing separately. The Schedule D instructions phrase it the other way round: you can deduct capital losses up to the amount of your capital gains plus $3,000. So losses against gains are unlimited; only the part that spills over onto wages, interest and other income is capped. If the net loss is larger, you carry the excess forward to later years.
A loss only counts on investment property. Topic 409 says losses on personal-use property, such as your home or car, are not deductible. A loss that falls under the wash sale rule is not deductible on that sale either; it moves into the basis of the new shares instead.
Netting: short-term first, then long-term
Schedule D sorts everything into two groups. Short-term means held one year or less, long-term more than one year. Part I adds up the short-term results, including any short-term carryover from last year on line 6, into line 7. Part II does the same for long-term, with the long-term carryover on line 14, into line 15. Line 16 combines the two. Only when line 16 is a loss does line 21 apply.
| Net short-term | Net long-term | Line 16 | Deducted | Carry short | Carry long |
|---|---|---|---|---|---|
| $4,000 | −$10,000 | −$6,000 | $3,000 | $0 | $3,000 |
| −$10,000 | $4,000 | −$6,000 | $3,000 | $3,000 | $0 |
| −$2,000 | −$5,000 | −$7,000 | $3,000 | $0 | $4,000 |
| −$5,000 | $8,000 | $3,000 | $0 | $0 | $0 |
| −$1,000 | −$1,500 | −$2,500 | $2,500 | $0 | $0 |
The fourth row shows why netting comes first. A $5,000 short-term loss and an $8,000 long-term gain net to a $3,000 gain, so nothing is deducted against other income and nothing carries over: the loss was fully used against the gain. In the last row the net loss of $2,500 is under the limit and is deducted in full. The capital gains tax calculator does this netting with your own figures and applies the 0, 15 and 20 percent rates to any net gain that is left.
How the carryover is figured
The Capital Loss Carryover Worksheet in the Schedule D instructions splits what is left into a short-term and a long-term part. In short, with taxable income of zero or more:
- Short-term carryover = net short-term loss − (the deduction taken + any net long-term gain). It goes on line 6 next year.
- Long-term carryover = net long-term loss − (any net short-term gain + the part of the deduction the short-term loss did not use). It goes on line 14 next year.
So the yearly deduction eats the short-term loss first. Each part keeps its character, which matters when the carryover later meets a gain. The worksheet also applies when taxable income would be below zero; then less of the loss counts as used and more carries forward.
A $20,000 loss, year by year
A single filer ends 2025 with a $8,000 short-term loss and a $12,000 long-term loss, $20,000 in all, and sells nothing in 2026 or 2027. In 2028 she realizes a $5,000 long-term gain.
| Year | Short-term | Long-term | Line 16 | Deducted | Carry short | Carry long |
|---|---|---|---|---|---|---|
| 2025 | −$8,000 | −$12,000 | −$20,000 | $3,000 | $5,000 | $12,000 |
| 2026 | −$5,000 | −$12,000 | −$17,000 | $3,000 | $2,000 | $12,000 |
| 2027 | −$2,000 | −$12,000 | −$14,000 | $3,000 | $0 | $11,000 |
| 2028 | $0 | −$6,000 | −$6,000 | $3,000 | $0 | $3,000 |
| 2029 | $0 | −$3,000 | −$3,000 | $3,000 | $0 | $0 |
Short-term and long-term include the carryover from the year before. The short-term part is used up first, in 2027. In 2028 the carried long-term loss of $11,000 swallows the whole $5,000 gain, so that gain is never taxed, and $3,000 is still deducted against other income. By 2029 the loss is gone: $15,000 reduced other income over five years and $5,000 cancelled a gain. At a 22 percent marginal rate each $3,000 deduction is worth about $660 of federal income tax; the 2026 brackets show which rate applies, and the income tax calculator shows the effect on a whole return.
Where it goes on the return
Schedule D line 21 asks for the smaller of the loss on line 16 or $3,000, with a note to treat both amounts as positive numbers when comparing, and the same figure goes on line 7a of Form 1040 as a loss. When line 16 is a loss, the form says to skip lines 17 through 20 and go to line 21. The carryover itself is not entered anywhere this year: it shows up next year on lines 6 and 14 of the new Schedule D, once the worksheet has been filled in.
Married couples
Joint filers share one $3,000 limit, not $6,000. Filing separately cuts it to $1,500 each. Without any later gains, a $10,000 loss takes 4 years to use up at $3,000 a year and 7 years at $1,500. And if a couple files jointly one year and separately the next, the Schedule D instructions say a carryover from the joint return can be deducted only on the return of the spouse who actually had the loss.
Points that trip people up
- Report every sale. The instructions say to report all gains and losses even if you cannot use all of the losses this year. Next year's carryover is figured from this year's Schedule D.
- The carryover is not automatic. It comes from the worksheet, using last year's Schedule D and taxable income. The general retention periods are in how long to keep tax records.
- Gains come first. A carried loss offsets next year's gains before it touches other income, as 2028 in the example shows.
- Rebuying within 30 days before or after a loss sale turns it into a wash sale and postpones the loss.
This guide follows IRS Topic 409, Schedule D and its instructions for 2025 returns and is not tax advice.
Frequently asked questions
How much capital loss can I deduct in a year?
All of it against capital gains, and up to $3,000 more against other income such as wages, or $1,500 if married filing separately. The Schedule D instructions put it as losses up to the amount of your capital gains plus $3,000. Anything beyond that carries forward to later years.
Do I lose the part above $3,000?
No. IRS Topic 409 says you can carry the excess forward to later years. The Capital Loss Carryover Worksheet in the Schedule D instructions works out how much carries over, and the result goes on next year's Schedule D, where it offsets gains first and then up to $3,000 of other income again.
Does a short-term loss carryover stay short-term?
Yes. The worksheet produces a separate short-term carryover, entered on Schedule D line 6, and a long-term carryover, entered on line 14. The short-term part is used first against the yearly deduction, so the long-term part tends to be the one that lasts.
Can I deduct a loss on my car or home?
No. IRS Topic 409 says losses from the sale of personal-use property, such as your home or car, are not tax deductible. Capital loss rules apply to investment property such as stocks, bonds and funds.
What happens to a carryover if we file separately after filing jointly?
The Schedule D instructions say a carryover from a joint return can be deducted only on the return of the spouse who actually had the loss when the spouses file separately later. Separate filers are also limited to $1,500 a year each.
Sources
- IRS Topic 409, Capital gains and losses (net capital loss deduction the lesser of $3,000 or $1,500 if married filing separately; carry the excess forward to later years; short-term one year or less, long-term more than one year; personal-use property losses not deductible)
- IRS, Instructions for Schedule D (2025) (losses up to capital gains plus $3,000; report all gains and losses; Capital Loss Carryover Worksheet lines 1 to 13 with the short-term carryover to line 6 and long-term to line 14; joint carryover on separate returns)
- IRS, Schedule D (Form 1040) 2025 (line 7 net short-term and line 15 net long-term including carryovers; line 16 combines them; line 21 the smaller of the loss or $3,000, $1,500 if married filing separately)
General information based on the sources above, not tax, legal or financial advice.