What is a capital loss deduction?

The capital loss deduction gives you a tax break for claiming your realized losses. In other words, reporting your losses to the IRS can shrink your tax bill. How much you can deduct depends on the size of your gains and losses. If you end up with a larger capital gain amount, you can subtract your losses from your gains.

How much capital gains & losses can I deduct?

The IRS will let you deduct up to $3,000 of capital losses (or up to $1,500 if you and your spouse are filing separate tax returns). If you have any leftover losses, you can carry the amount forward and claim it on a future tax return. Capital gains and losses fall into two categories: long-term gains and losses and short-term gains and losses.

How does a 3000 deduction work?

The $3,000 deduction uses up your net short-term capital loss of $250 ($850 - $600) and $2,750 of your net long-term capital loss, resulting in a balance of $3,725 ($7,500 - $1,025 - $2,750) in long-term capital loss available for carryover to the next year. The computation of the carryforward is as follows: