Capital Loss Carryover

Not every investor can be successful. In fact, most are not. Some 98% under-perform their relevant index fund comp each year. That’s just a nice way of saying more people are bad at trading than people who are good at it.

Although every trade is not a zero-sum game, some people lose a lot of money every year. Even though the IRS takes as much as it can, it does give losing investors a bit of a break every year in the form of being able to deduct their losses.

Whether your company loses money or you lose your shorts investing, you can write off a certain amount of these losses on your taxes. The law says you can have a capital loss of your Schedule D of up to $3,000 if you’re married. If you’re single, you can file a $1,500 loss.

So, what’s the point of this? Well, some people lose more than $3,000 each year.

Let’s just say that you lose $7,000, and you’re married. To compensate, the IRS allows you to carryover up to $3,000 per year, meaning you can carryover $3,000 in Year 1, $3,000 in Year 2, and $1,000 in Year 3. Those losses can also be deducted from taxable gains the following year.

So if in Year 2 you earned $5,000 trading, you can deduct that carryover loss of $3,000, and only have to pay taxes on the difference...or $2,000.

There’s no limit to how many times you can carryover losses. But remember, the goal is to actually make money.

So, don’t act like this provision is a good thing. Treat it more like a mulligan.