Are capital gains and losses paid per stock or cumulatively for that tax period? [duplicate]

Question

I'm trying to understand taxes as they relate to investments in the United States of America. I've been reading online about capital gains/losses taxes and I'm a bit uncertain how taxes are determined exactly. Take the following example:

Say in the same tax year I bought and sold stock from three different companies, Company A, Company B, and Company C. My investments in Company A & Company B did well and I made $5,000 from each investment. Where my investment into Company C did not do well and I sold at a loss of $5,000.

I originally thought this would net a total taxable gain of $5,000.

Tax Outcome 1

Company A gain ($5,000) + Company B Gain ($5,000) - Company C Loss ($5,000) = $5,000 capital gain

However, I've read in other places that you can only claim a total of $3,000 in capital losses per year and any loss over the $3,000 would have to be carried forward in to the next years taxes. Which given this scenario would result in paying taxes on $7,000 and carrying forward $2,000 of losses into the next year.

Tax Outcome 2

Company A gain ($5,000) + Company B Gain ($5,000) - Company C Loss ($3,000) = $7,000 capital gain + $2,000 carry forward tax loss

Can anyone tell me which tax outcome (1 or 2) is the correct assumption?

Answer 1

Outcome 1 is correct.

In the USA, losses are first used to offset capital gains of the same type. Short-term losses are deducted against short-term gains and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.

• If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income.

• Any excess net capital loss can be carried over to subsequent year(s)

• If you use married filing separate filing status, however, the annual net capital loss deduction limit is only $1,500

Answer 2

In the US, you have short-term and long-term capital gain. First, the losses of each type offset gains of the same type, then any leftover losses offset gains of the other type, then you are taxed on the net with the tax rate based on the type. As you noted, losses can be limited and excess could need to be carried forward.

The results/details of individual trades only matter in so much as they dictate whether or not the gain/loss is short/long-term, and whether there are wash-sale rules in play.

So your Outcome 1 is correct, the limitation wouldn't apply unless you had net loss greater than $3k (or had wash-sales that limited losses you could claim).

Answer 3

Outcome number 1 is correct.

The $3,000 limit only applies when you are offsetting other income other than investment income.

For example, if the losses from Company C had been much larger, say -$15,000, then -$10,000 of that would cancel out the +$10,000 in profits from Companies A and B, but you still would be left with -$5,000 in net losses. You can then use up to -$3,000 of that to offset other kinds of income (like your income from your regular job, etc), and the remaining -$2,000 gets carried over to future years.