Capital Loss Carryover

[lsowers]

Hi all,

Client calls, he went to some IBM seminar headed by a guy that is an H&R Block district instructor.

This particular client has had a large C/L carryover since I have done his returns. Since the only reason he files is because of his gross stock proceeds, he has asked in the past about being able to preserve his capital loss (not use the $3k each year). I have told him no, his $3k would be deducted regardless, it is not a choice. I had confirmed it with my former boss and co-worker (a CPA and an EA).

At any rate, he proceeds to ask this speaker the same question. The speaker says I am wrong, that he does not have to take the 3k each year, he can just use enough of his C/L carryforward to break even each year. The speaker says thats what it says in his book (what book I don't know).

So, I tell my guy I will look into it again sometime. I find in 1040 express answers that you must use the $3k (but no reference to a code section). I believe sections 1211 and 1222 are what I need to show my guy that when calculating his carryover each year, it takes into consideration the allowable deduction whether or not it is used.

Could one of you scholars please tell me if I am on the right track, or completely off the tracks and the HRB guy is right. I told my client in all of my schooling and EA exam and CPA exam I had not heard of being able to choose whether or not to take the $3k C/L deduction.

Thanks so much

[Alpha]

I think what he misunderstood was that if you have an overall gain then the carryover can be used to the extent of the gain. So if you have a net gain of $5,000 and the carryover is $10,000 the gain is wiped out and you have an overall loss of $5,000 of which you can only take $3,000 that year against other income so the following year you will only have $2,000 carry over. You can't however not take the $3,000 against other income unless there is no other income.

I am sure I did not explain that very well.

[OldJack]

The instructor may be correct if the loss was not used to offset income!!

If you take a blank ATX 1040 form with no income and enter a 10,000 carryover loss from prior year for Sch-D you will find that 1040 page 1 will show the -3,000 but when you look at the worksheet for carryforward to the next year the 3,000 will be added back as it was not used.

[lsowers]

Old Jack,

That scenario makes sense. This client in particular does have other income, just not enough to be taxable each year. So, back to my original question, the $3k must be deducted each year against the other income, right?

Thanks for the responses thus far

[Pacun]

Let me see if I understand the question:

Can a single person who makes only 5K taxable income, elect not to use the 3K loss from previous years because his 5K will be wiped out by his standard deduction? The answer is no.

[lsowers]

Let me see if I understand the question:

Can a single person who makes only 5K taxable income, elect not to use the 3K loss from previous years because his 5K will be wiped out by his standard deduction? The answer is no.

That's what I thought, now do you think IRC 1211 and 1222 will be the best things to show my client so he will quit asking me this.

[mgmea]

Let me see if I understand the question:

Can a single person who makes only 5K taxable income, elect not to use the 3K loss from previous years because his 5K will be wiped out by his standard deduction? The answer is no.

But I believe the answer is "YES" that they will still have a 3K capital loss carryover to the next years return in this situation. If the OP is simply subtracting 3K each year from the carryover capital loss they may be making a very grave error. You have to use the capital loss carryover worksheet to determine how much of the loss is used up each year. If a single person has 5K of wages and a 3K capital loss and nothing else on their 2007 tax return, they will have a 3K capital loss carryover to their 2008 tax return.