Dear Ms. Goodman, I'm not sure if it is proper to ask you this question or not, but I have looked and not found a simple answer. Say I have losses of $12,000 in a particular year and only $3,000 in gains that year. I can offset that $3,000 in gains, plus another $3,000 of income, but that still leaves $6,000 in losses to carry over. My question is this: Do I just keep my records of the losses of $6,000 and report those trades the following year? My sale dates will show as being a previous year rather than the year in which I am reporting the trades; I know the purchase dates are fine but it is the sale date I am not clear about. Thanks,Leon Welch
For those of us first joining us, let's start with the basics: You're absolutely right -- you can use capital losses to offset capital gains, which reduces your taxable income. You must first apply your losses to long-term capital gains; if your losses exceed your long-term gains then you can use them to offset short-term gains. If you still have losses to report, you can then reduce your ordinary income by up to $3,000. (That $3,000 is
, regardless of whether you file singly or jointly.) Any remaining losses can be carried over to future years to offset future gains and/or ordinary income.
As to your question -- you should report all of your losses on Schedule D of your 2002 tax return, regardless of whether you'll be able to claim them all on this year's 1040. All 2002 trades should be reported in 2002, although you should absolutely retain the records of those trades. As you work through the Schedule D, it will direct you to reduce your capital gains and then carry over the $3,000 reduction to the 1040, where it will reduce your taxable income. There's also a line on Schedule D (line 14) that asks you to enter any carryover amount from prior years. That's where you'll write your $6,000 in carried-over losses on
return. You won't have to re-report the actual trades; again, they should all be reported in the year they were made.
For more information, get the instruction booklet for Schedule D, and go over the "Capital Loss Carryover Worksheet" that's a part of it. You can find all forms and instructions at the IRS Web site,
Tax season leaving you confused? Send your questions or comments to Beverly.Goodman@thestreet.com. To read more tax stories from Bev, check out the TSC Tax Center