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I understand it can be done... I don't need to know that.

...But I don't understand the mechanism used to track and carry over the capital losses for future years...

I am entering my stock trades into the software and it is taking all of them without warning. Say, 30K in gains and 15K in losses. I am limited to deducting $3000 in losses, but I do not understand:

-Does the software want me to enter all of my losses for that year and its magic only deducts the eligible $3000?

-Am I only supposed to enter $3000 worth of losses?

-If I enter them all for the year, does the software track the remaining deductible value and enter them when I load up the previous year's taxes into the next year's filing?

-Am I supposed to track the losses myself forever?... and in future years, identify those shares?

I get a little confused, because when I start deleting bits of the 15K of losses, my tax goes up... That says to me that the number I owe, has taken into consideration the entire 15K of losses... I would think if that software was considering only the 3K deduction, it would keep my tax the same until I deleted 12K of losses?

I can't find anything anywhere about how to specifically execute this, only that "it is allowed"...

To be clear, I am entering the 2020 gains/losses now, and will be carrying over losses next year(and on)...

Anyone familiar?

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Losses in 2020 fully offset gains in 2020. So if you have 30,000 in gains in 2020 and 15,000 in losses in 2020, the 15,000 in losses are fully deductible against the 30,000 in gains and you'll pay taxes on the 15,000 of net gains you realized. There will be no carryforward of losses into next year.

Carryforward of losses would come into play only if you had a net loss. So if you had 15,000 in gains and 30,000 in losses in 2020

  • 15,000 in losses fully offset all your gains so you have 0 in net gains
  • 3,000 in losses offset other earned income
  • 12,000 in losses carry forward to the next year where they can offset capital gains or up to 3,000 in earned income in those years
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  • I've been ignoring the word "net"... appreciate it... That indeed solves my current concern but.... What would the answer to the question be? I wouldnt know what to do if indeed i had the $12000 carry forward as in your example... or do you think the software would behave different in that scenario?
    – WU-TANG
    Mar 21 at 10:19
  • @WU-TANG - I'm sure that your tax software would handle this automatically. If you were doing it manually, you'd complete the Capital Loss Carryover Worksheet as part of filling out Schedule D. That would ask you to look at your prior year's Schedule D to see how much you were allowed to carry forward ($12,000 in this example). Mar 21 at 10:30
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The software should track this. I know that the software I use successfully tracks from year to year other items:

  • Education tax breaks that can only be used 4 times
  • Points on a mortgage that was refinanced.

The first thing that it does each year is ask for the previous file and ingest items from the old tax form. It pulls out names, addresses, sources of 1099s, and W-2s. This is done to streamline data entry. But it is also pulling data from the various worksheets that are to be used to track the items that extend over multiple years.

You see this when the software can compare totals to previous years. You also see this when it lists all the 1099s and all the places you donated stuff or money to the previous year. It also knows last years refund and AGI, because these can be important for some steps of the tax filing process.

If the software couldn't do these things, then one of the benefits of using software would be missing.

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List the individual transactions on as many Form 8949's as you need.

You then calculate the totals on those sheets before you even bring that onto the Schedule D. So individual transaction losses and gains are already canceling each other out. That is fine.

That is to say, you don't do a totally separate form for losses and another one for gains. But you do have separate forms for different types of transactions, see boxes A-F on the Form 8949.

If you have net total loss, that gets worked out on the Schedule D. If your total investments were a loss this year, your deduction this year is limited to $3000.

The year after you take the loss, you pull the numbers from last year's tax forms and plug them into the Capital Loss Carryover Worksheet (on page D-11 of the instructions this year). That worksheet sanity-checks a few things for you, then gives you an answer that is not a surprise, and that number drops into line 6 of your Schedule D. Easy as pie.

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