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Short-Term Capital Loss offsetting Long-Term Capital Gains


Yardley CPA

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Please verify my understanding that you can offset long-term capital gains with short-term capital losses?  

During 2022 client sold a rental property resulting in LTCG of about $100,000.  Client also had STCL of about $77,000 in stock/mutual fund sales.  I know that the STCL would first offset STCG, but assuming there are no STCG, the loss can be taken in it's entirety against the LTCG, correct?

Thanks very much. 

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Found this below. My thinking was exactly as yours but I thought there were either limits or ordering rules

"Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first 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."

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1 hour ago, Terry D EA said:

Found this below. My thinking was exactly as yours but I thought there were either limits or ordering rules

"Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first 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."

Thanks, Terry.  I know there are ordering rules but what I'm wondering is if there are no STCL, can the STCG offset all the LTCG without limits.  I'm researching it but can't find anything definitive.  Hopefully someone has some experience with it.  Thanks again. 

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3 hours ago, Yardley CPA said:

wondering is if there are no STCL, can the STCG offset all the LTCG without limits. 

 I'm not sure what you mean, because in your wording above you have both types of gains but no losses.

 The way the ordering rules work is this:  NET short term gains are determined, and NET long term gains are determined, and then those two are combined. It is possible that one or the other of those,or both, ( short or long) are losses and will be combined to determine the net overall gain or loss.   If that overall net figure is a loss, you can deduct down to a net $3000 loss on that year's tax return.  It may be helpful in your understanding to picture the flow of these items on the actual form 1040 scheduled D.

Perhaps some of your confusion here is that the ordering rules do come in to play again when there is an overall net loss after using down to a $3000 loss in the current year and where the taxpayer still has a loss carryover to the following year and must determine the breakdown of the carryover between short and long.

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In addition to above, going back to your original facts, the client will offset the LTCG by the STCL and will have a net gain on schedule D of $23K.  There is one other place that the ordering rules and these offsets can affect the tax and is taken into consideration, and that is the tax calculation if using the cap gain tax worksheet to Sch D, and that is also dependent on other items of income on the client's return.  In your client's case, that net gain should produce the cap gain tax worksheet and may possibly yield a lower tax. 

If you are unsure how this all works, perhaps it is best for you to run a projection through your software and see the flow of these individual components on Sch D and that tax worksheet. 

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