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.
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Finance: What is Tax Loss Carry-Forward?328 Views
finance a la shmoop what is a tax loss carry forward
all right well feel bad about losing money in your business last year
well this law will help make you feel a whole lot better you had been going [guy sinking in bath]
along swimmingly making ten million bucks a year in your hot tub pimp out
biz where you are the premier provider of turbo Jets neon lights spa caddies [fancy hot tub]
massaging floor inserts and literal wet bars but then Kanye launched a competing [alcoholic beverages]
business called hot and wet by Kanye and the next year well you lost six million [Hot and Wet by Kanye building]
bucks well on your 10 million of taxable profits in a year you had been paying 30
percent tax or 3 million bucks in taxes to show net income or earnings of 7
million dollars well you lost 6 million dollars last year so you paid no tax and
no the government doesn't rebate you 30% in taxes like they don't write you a
check for 30% of 6 million or 1.8 million years that you lose money
running your business but they do allow you to carry forward that loss into the
next year or the next or the next usually up to 7 years total in most
cases so that tax loss of 6 million bucks then comes in handy the following
year when Kanye's hot tubs are found to be administering second-degree burns to [Hot and Wet news paper]
its buyers and you once again make 10 million dollars in taxable profits only
this time you have 6 million dollars of tax loss carry forward that gets first
subtracted from the 10 million before you have to even think about taxes so in
this case you pay taxes on just 4 million dollars or 30% of 4 million or
just 1.2 million in taxes to net 2.8 million in net income essentially the
government splits your losses and lets you take the taxable part of losses into
the future so that the lows are not so low and well as far as Kanye is
concerned the highs are not so high [Kanye in court]
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