Net Capital Losses

After the netting of long-term and short-term capital gains and losses for any tax year, any remaining net capital loss in excess of $3,000 ($1,500 for married taxpayers filing separately) must be carried forward into the next tax year. That carryforward retains its character as long-term or short-term for netting purposes in that year. One consolation from this carryover rule for higher-bracket taxpayers may be that net capital losses carried over to post-2010 years may get to offset income taxed at higher rates if administration tax proposals move forward as planned.

Under Code Sec. 165(g), taxpayers do not always have to sell a capital asset to deduct a capital loss. If the stock becomes worthless (sadly, not an uncommon occurrence lately), the taxpayer may treat this loss of value as if they sold the stock on the last day of the tax year. This deemed sale results in a deductible capital loss. The stock must be totally worthless, and its worthlessness must be established by an identifiable event, such as bankruptcy.

Code Sec. 1244 special rules govern losses individuals claim on the sale of small-business stock. A small business is a domestic corporation with aggregate paid-in capital of $1 million or less. The losses are treated as ordinary loss and are not netted against capital gains. However, the ordinary loss deduction is limited to $50,000 ($100,000 in the case of a husband and wife filing a joint return).

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent -720-234-1177