For the 2025 U.S. federal tax year, an individual's capital losses for the year exceed their capital gains by $12,000, and the individual has no other capital transactions. Under IRC Sections 1211 and 1212, how is this net capital loss treated on the individual's return?
- The entire $12,000 net capital loss is deductible against ordinary income in 2025, since there is no dollar limit on the amount of capital losses an individual may deduct against other income in a single year
- None of the $12,000 net capital loss is deductible in 2025; the entire amount must be carried forward, since net capital losses can only offset capital gains and are never deductible against ordinary income
- $3,000 of the loss is deductible against ordinary income in 2025, and the remaining $9,000 is permanently lost if it is not used within the next three tax years
- $3,000 of the loss is deductible against ordinary income in 2025, and the remaining $9,000 carries forward to later tax years with no expiration, retaining its original short-term or long-term character until it is fully used
Why D? And why not the others?
Correct answer: D. $3,000 of the loss is deductible against ordinary income in 2025, and the remaining $9,000 carries forward to later tax years with no expiration, retaining its original short-term or long-term character until it is fully used
Under IRC Section 1211(b), an individual may deduct net capital losses against ordinary income only up to $3,000 per year ($1,500 for married taxpayers filing separately); any net capital loss beyond that amount is not lost but, under IRC Section 1212(b), carries forward indefinitely to future tax years, where it retains its original short-term or long-term character and is used to offset capital gains first before any further amount is again deductible against ordinary income up to the annual limit. Here, $3,000 of the $12,000 loss offsets ordinary income in 2025, and the remaining $9,000 carries forward with no expiration date. The option allowing the entire $12,000 loss against ordinary income in one year is wrong because Section 1211(b) caps that annual offset at $3,000 regardless of the total loss. The option denying any deduction at all is wrong because the $3,000 annual offset against ordinary income is exactly what Section 1211(b) permits, not merely an offset against future capital gains. The option describing a permanent loss of the excess after three years is wrong because Section 1212(b) imposes no time limit on the carryforward for an individual taxpayer; the balance can carry forward for as many years as needed to be fully absorbed.
Source: IRS Topic no. 409, Capital gains and losses (irs.gov/taxtopics/tc409)