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Quick question about the statute of limitations on capital loss carryover. If in 2004 I exceeded $3,000 in net capital loss, but didn't carry any of the excess over in 2005 (because I didn't need it to get a full refund that year), am I now eligible to carry over that excess loss from '04 to use with my 2006 federal return? i know that you can continue to carry capital loss over year after year until it is used up, but what if you skip a year (or two)? Is it still yours to use?

P.S. Someone mentioned this to me:
You can only carry forward the amount that would have been left over if you had claimed your capital losses in 2005. Do a capital gains carryover worksheet using your 2005 numbers & ($3,000) for the deductible capital loss.

Is this true? I am not very clear what is says<img src="i/expressions/face-icon-small-confused.gif" border=0>

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BrunoB said: [Q]Quick question about the statute of limitations on capital loss carryover. If in 2004 I exceeded $3,000 in net capital loss, but didn't carry any of the excess over in 2005 (because I didn't need it to get a full refund that year), am I now eligible to carry over that excess loss from '04 to use with my 2006 federal return? i know that you can continue to carry capital loss over year after year until it is used up, but what if you skip a year (or two)? Is it still yours to use?

P.S. Someone mentioned this to me:
You can only carry forward the amount that would have been left over if you had claimed your capital losses in 2005. Do a capital gains carryover worksheet using your 2005 numbers & ($3,000) for the deductible capital loss.

Is this true? I am not very clear what is says<img src="i/expressions/face-icon-small-confused.gif" border=0>

No, you are not eligible to carryover after skipping a year unless the carryover exceed $3k, in which case you can only carryover the amount that exceeds $3k. "Someone" was correct. To get credit for those first $3k you would need to file an amended 2005 return, which I guess in your case won't help.

From IRS publication 550:

"If you have a total net loss on line 16 of Schedule D that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up. When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it."


Someone correct me if I'm wrong, but I believe the correct procedure is:

Let's say your net capital loss in 2004 was $10,000, and, in 2005, ignoring the carry-forward, your income was $2000, all ordinary. You would get a $3000 deduction on your 2004 return, leaving $7000 carried forward; on your 2005 return, you would deduct $3000, leaving a $1000 net operating loss and $4000 capital loss carried forward; on your 2006 return, you deduct the $1000 NOL against your ordinary income, apply the $4000 against any capital gain, and deduct up to $3000 more, carrying the rest, if any, forward again.

In other words, your 2005 no-tax year still serves to convert $3000 of capital loss into ordinary loss that you can save in future years.

Is that wrong?

LH2004 said: [Q]Someone correct me if I'm wrong, but I believe the correct procedure is:

Let's say your net capital loss in 2004 was $10,000, and, in 2005, ignoring the carry-forward, your income was $2000, all ordinary. You would get a $3000 deduction on your 2004 return, leaving $7000 carried forward; on your 2005 return, you would deduct $3000, leaving a $1000 net operating loss and $4000 capital loss carried forward; on your 2006 return, you deduct the $1000 NOL against your ordinary income, apply the $4000 against any capital gain, and deduct up to $3000 more, carrying the rest, if any, forward again.

In other words, your 2005 no-tax year still serves to convert $3000 of capital loss into ordinary loss that you can save in future years.

Is that wrong?

I do not know the answer, and I am very interested to know. But if we go with this logic, let's say the taxable income in 2005 was not $2,000 but only $1. Then does this mean we will be left with $2,999 NOL? In other words, with no taxable income in any given year, we can convert $3,000 of capital loss into ordinary loss and save for future years? Sounds questionable to me. <img src="i/expressions/face-icon-small-confused.gif" border=0>

LH2004 said: [Q]In other words, your 2005 no-tax year still serves to convert $3000 of capital loss into ordinary loss that you can save in future years.

Is that wrong?With regards to NOLs:
[Q]Nonbusiness capital losses. You can deduct your nonbusiness capital losses (line 2) only up to the amount of your nonbusiness capital gains without regard to any section 1202 exclusion (line 3). If your nonbusiness capital losses are more than your nonbusiness capital gains without regard to any section 1202 exclusion, you cannot deduct the excess. (pub 536)
It appears that non-business capital losses cannot create NOLs.

As far as what you can carryforward, pub 550 has the answer:
[Q]Capital loss carryover. If you have a total net loss on line 16 of Schedule D that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up.

When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it.

When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains.

Figuring your carryover. The amount of your capital loss carryover is the amount of your total net loss that is more than the lesser of:

1. Your allowable capital loss deduction for the year, or
2. Your taxable income increased by your allowable capital loss deduction for the year and your deduction for personal exemptions.

If your deductions are more than your gross income for the tax year, use your negative taxable income in computing the amount in item (2).

I'm not awake enough tonight to really read that carefully, but it seems that the IRS is not going to let you pick and choose when to use your capital loss carryforward. If you could offset income with the capital loss carryforward in a tax year, you must reduce the capital loss carryforward by the amount you could use whether you use it or not.

Read publication 550 if you want to learn more. link

cashmonkey said: [Q]BrunoB said: [Q]Quick question about the statute of limitations on capital loss carryover. If in 2004 I exceeded $3,000 in net capital loss, but didn't carry any of the excess over in 2005 (because I didn't need it to get a full refund that year), am I now eligible to carry over that excess loss from '04 to use with my 2006 federal return? i know that you can continue to carry capital loss over year after year until it is used up, but what if you skip a year (or two)? Is it still yours to use?

P.S. Someone mentioned this to me:
You can only carry forward the amount that would have been left over if you had claimed your capital losses in 2005. Do a capital gains carryover worksheet using your 2005 numbers & ($3,000) for the deductible capital loss.

Is this true? I am not very clear what is says<img src="i/expressions/face-icon-small-confused.gif" border=0>

No, you are not eligible to carryover after skipping a year unless the carryover exceed $3k, in which case you can only carryover the amount that exceeds $3k. "Someone" was correct. To get credit for those first $3k you would need to file an amended 2005 return, which I guess in your case won't help.

From IRS publication 550:

"If you have a total net loss on line 16 of Schedule D that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up. When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it."

Thanks cashmonkey, I really appreciate your quote from the IRS. When it says, you must take the current year's allowable deduction into account, does it mean you must subtract $3,000 (maximum allowable) if the amount exceeds $3,000? Let's say net capital loss in 2004 was $10,000, and I deducted $3,000 in 2004, but I didn't need any deduction to get a full refund in 2005. Does it mean I now can carry over only $4,000 to 2006?

BrunoB said: [Q]Thanks cashmonkey, I really appreciate your quote from the IRS. When it says, you must take the current year's allowable deduction into account, does it mean you must subtract $3,000 (maximum allowable) if the amount exceeds $3,000? Let's say net capital loss in 2004 was $10,000, and I deducted $3,000 in 2004, but I didn't need any deduction to get a full refund in 2005. Does it mean I now can carry over only $4,000 to 2006?Not necessarily. The IRS won't allow you to chose not to use your capital loss carryforward and take advantage of something else (like a non-refundable credit) to reduce your tax to zero and carry the full capital loss forward. Read my previous post for the IRS's explanation. In some other situations, you may be able to carry the full capital loss forward.

Actually the following statement from your OP was absolutely correct:
[Q]P.S. Someone mentioned this to me:
You can only carry forward the amount that would have been left over if you had claimed your capital losses in 2005. Do a capital gains carryover worksheet using your 2005 numbers & ($3,000) for the deductible capital loss.

You need to show your entire capital loss carryover on Schedule D. You cannot "skip a year." Then on the front of your 1040 you will show a loss of $3000 (or your net loss from Schedule D, whichever is a smaller loss). This can result in a negative AGI for the year. Then you fill out the capital loss carryover worksheet. The worksheet is in Pub 550 for the current year or the Schedule D instructions for the next year. You may find that not the entire $3000 has been used up.

The way the worksheet works, essentially you take your AGI, you add back the capital loss you show on your 1040, then subtract your itemized or standard deduction (whichever you used) and this number (not to exceed $3000, $1500 if MFS) is the amount of the carryover you use up for the year. This essentially means that your exemptions might be "wasted" and that if you have some large tax credit that reduces your tax to zero, your carryover is wasted.

It doesn't matter whether you "need" the loss in 2005, you must fill out Schdule D and show the full carryover and carry the amount as directed on Schedule D to the front of your 1040. You can then use the carryover worksheet to determine how much of the carryover has been used up and how to carry foreard to the next year. The amount that is used up is not necessarily the same as the amount you showed on the front of your 1040.

BrunoB said: [Q]
Thanks cashmonkey, I really appreciate your quote from the IRS. When it says, you must take the current year's allowable deduction into account, does it mean you must subtract $3,000 (maximum allowable) if the amount exceeds $3,000? Let's say net capital loss in 2004 was $10,000, and I deducted $3,000 in 2004, but I didn't need any deduction to get a full refund in 2005. Does it mean I now can carry over only $4,000 to 2006?
You might carry over any amount from $4000 to $7000. Fill out the carryover worksheet to find out for sure. The answer depends on your AGI for 2005 and the amount of deductions taken on Form 1040 line 40 for 2005. Just to clarify, you don't have any option about the amount to carry over. You have to use the amount that the worksheet gives you.

Click here and go to page D-7 to calculate your 2005 to 2006 carryover.

So basically, you are allowed to deduct up to $3,000 every year from your original capital loss carryover (assuming it is large enough for years to come). Use it (the $3K deduction) or lose it. Either way, it is like steady depreciation: $3,000 reduction each year until it is gone, no matter you use it or not in any subsequent year. Is this correct?

BrunoB said: [Q]So basically, you are allowed to deduct up to $3,000 every year from your original capital loss carryover (assuming it is large enough for years to come). Use it (the $3K deduction) or lose it. Either way, it is like a steady depreciation: $3,000 reduction each year until it is gone, no matter you use it or not in any subsequent year. Is this correct?
It is pretty much correct. However in any year when your AGI (not including the loss) is less than your deductions (but not your exemptions), your carryover will not depreciate.

All this also assumes you have no capital gains. Remember that carryover losses (or any other losses) must first be used in full to offset any capital gains in any given year.

BrunoB said: [Q]So basically, you are allowed to deduct up to $3,000 every year from your original capital loss carryover (assuming it is large enough for years to come). Use it (the $3K deduction) or lose it. Either way, it is like a steady depreciation: $3,000 reduction each year until it is gone, no matter you use it or not in any subsequent year. Is this correct?Unless you have net capital GAINS the following year, then your 'reduction' is the amount necessary to reduce that GAIN down to -$3000 (ie, $3000 plus whatever the gain is).

frootmall said: [Q]BrunoB said: [Q]So basically, you are allowed to deduct up to $3,000 every year from your original capital loss carryover (assuming it is large enough for years to come). Use it (the $3K deduction) or lose it. Either way, it is like a steady depreciation: $3,000 reduction each year until it is gone, no matter you use it or not in any subsequent year. Is this correct?
It is pretty much correct. However in any year when your AGI (not including the loss) is less than your deductions (but not your exemptions), your carryover will not depreciate.

All this also assumes you have no capital gains. Remember that carryover losses (or any other losses) must first be used in full to offset any capital gains in any given year.

Thank you very much. I think I got it (at last)! I got a ton of valuable info on this topic tonight. <img src="i/expressions/face-icon-small-smile.gif" border=0>

Wow, this is great to know. Glad to see we have a lot of smart people on this board that are willing to help. I have a similar yet easier situation that I am not 100% sure about too.

I have a LLC for my business that I receive 1099's for and claim everything on my personal tax return (taxed as a sole proprietor). In 2005, I made no money from working a regular job (and hence paid no taxes), but received a few 1099's for some work I did. I was able to take enough deductions for expenses that my 2005 AGI was $-2,433. I ran the numbers and it didn't make sense to carry the loss back to 2004 (knowing I would be making more 1099 money in 2006), so I filed the "Section 172 (b) (3)" - "Election To Forego the Carryback Period for Net Operating Loss" with my 2005 taxes.

Now in 2006, I made a good amount of money in a regular job and paid taxes, plus I did a lot more business though my LLC. I ran though everything and dug through and found the spot in TurboTax to write in the $-2,433 under the federal "Other Income" as a NOL Carryover.

At this point, I think I have done everything correctly until I clicked Next. After that, TurboTax asked me to write in an explanation of how I calculated the NOL Carryforward (Screen Shot) and I really don't know or understand what to write in there. Should I just say that the $-2,433 was my AGI from my 2005 filing? Is there some sort of proper terminology to describe this?

Thanks in advance guys - have a great day.

Edit: I forgot to mention that I also ran though my taxes with TaxCut, but they did not ask me to write a statement about how I determined the NOL amount.

I am not sure if negative AGI automatically translates into NOL. I also suggest you open a new thread because this one is old and could go unnoticed.

BrunoB said: [Q]I am not sure if negative AGI automatically translates into NOL. I also suggest you open a new thread because this one is old and could go unnoticed.

Ah, I see what you mean. Here is a censored copy of my 2005 Schedule C. Is the highlighted amount on line 31 the actual amount I should be using?

2005 Schedule C

Be sure to expand the image if your browser automatically shrinks it so it is visible.

If this is the right amount, I guess I should explain it as the "Net loss as reported on the 2005 Schedule C" ?

drdavidge said: [Q]BrunoB said: [Q]I am not sure if negative AGI automatically translates into NOL. I also suggest you open a new thread because this one is old and could go unnoticed.

Ah, I see what you mean. Here is a censored copy of my 2005 Schedule C. Is the highlighted amount on line 31 the actual amount I should be using?

2005 Schedule C

Be sure to expand the image if your browser automatically shrinks it so it is visible.

If this is the right amount, I guess I should explain it as the "Net loss as reported on the 2005 Schedule C" ?
Now, that amount is definitely NOL, and you should be able to use it. I don't know the answer to why you need to explain it. I guess we need an expert opinion. Again, you might get faster results if you opened a new thread because this one is old.

Thanks again. I just posted it in the tax thread here.



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