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Tax Loss Carryforward Rules: How to Use Prior-Year Losses

Q: how long can you carry forward a tax loss on your federal return?

n Under current federal law, net operating losses (NOLs) generated after December 31, 2017 can be carried forward indefinitely u2014 there's no expiration date. You can't carry them back anymore (with limited exceptions for farming losses and certain insurance companies), but you'll never lose the deduction entirely. The catch is that you can only use the NOL to offset up to 80% of your taxable income in any given year. So if you have $100,000 in taxable income and a $200,000 carryforward, you can only deduct $80,000 this year, leaving $120,000 for future years. n Pre-2018 losses play by different rules. Losses from tax years before 2018 still carry the old 20-year limit and weren't subject to the 80% cap u2014 they could offset 100% of income. That distinction matters a lot if you're sitting on older losses. Also, the CARES Act temporarily allowed a 5-year carryback for NOLs generated in 2018, 2019, and 2020, which gave some businesses a chance to get refunds on taxes paid in profitable prior years. If you missed that window, it's gone u2014 but it's worth confirming you didn't leave money on the table. n Tracking carryforward balances across multiple years, especially when pre- and post-2017 losses are mixed together, gets complicated fast. At The Reed Corporation, we keep a running schedule of each client's NOL balance, vintage, and applicable rules so nothing gets misapplied on Form 1040 or 1120. If you're not sure what you're sitting on, that's exactly the kind of thing a quick review can sort out. n

Q: can I use a business loss to offset my personal income on my tax return?

n Yes, but it depends on how your business is structured and whether the loss clears a few hurdles first. If you're a sole proprietor or single-member LLC, business losses flow directly onto Schedule C of your Form 1040 and can offset wages, investment income, or other personal income. S-corp and partnership losses pass through to your personal return too, reported on Schedule E u2014 but only up to your basis in the entity. Losses beyond your basis get suspended, not lost, until your basis is restored in a future year. n Two rules trip people up: the at-risk rules under IRC Section 465 and the passive activity loss rules under IRC Section 469. Even if you have enough basis, you can only deduct what you're economically at risk for. And if you're not materially participating in the business u2014 generally meaning fewer than 500 hours per year u2014 the loss is considered passive and can only offset passive income, not your salary or interest income. There's also the excess business loss limitation under IRC Section 461(l), which caps individual business losses at $305,000 for single filers and $610,000 for married filing jointly in 2024. Losses above those amounts get converted into an NOL carryforward. n These rules layer on top of each other, and missing one can mean an unexpected tax bill or a lost deduction. The Reed Corporation works through each layer for business-owner clients every year, making sure losses are being claimed correctly and that any suspended amounts are tracked and ready to use when the time is right. n

Q: what is a tax loss carryforward and how does it actually work?

n A tax loss carryforward lets you take a loss from one year and apply it against income in a future year, reducing your tax bill down the road. The most common form is an NOL carryforward, which happens when your business deductions exceed your gross income for the year. You record the loss, carry it forward on your books and tax return, and then deduct it in future profitable years u2014 subject to the 80% income limitation for post-2017 losses. It's tracked on Form 1045 (for quick refunds) or directly on your Form 1040 or 1120 using the prior-year loss carryover worksheet. n Capital loss carryforwards work a bit differently. If your investment losses exceed your gains in a given year, you can deduct up to $3,000 against ordinary income annually and carry the rest forward indefinitely. There's no 80% cap here, and the carryforward retains its character u2014 long-term losses stay long-term, short-term stay short-term u2014 which matters because they offset gains in a specific order. State rules add another layer of complexity. New York, for example, conforms to federal NOL treatment in some respects but has its own adjustments, and not every state follows the TCJA changes. n Most people don't realize how much these carryforwards are worth until they have a big income year and suddenly need them. Keeping clean records of your loss balances, organized by type and year, makes a real difference. That's something The Reed Corporation builds into every client's year-end planning process. n

Q: does New York State follow federal tax loss carryforward rules?

n New York conforms to federal NOL rules in some areas but not all, and the differences can cost you real money if you assume they're the same. For individuals, New York generally follows the federal NOL calculation but requires you to recompute the NOL using New York-specific income modifications. Things like the federal qualified business income deduction under IRC Section 199A don't exist in New York, so your state NOL can differ significantly from your federal one. You'll report and track these separately on Form IT-203 or IT-201. n For corporations, New York has its own distinct NOL rules under the Article 9-A franchise tax regime. The state allowed a COVID-related NOL deferral program for certain tax years, and New York City has its own General Corporation Tax with rules that diverge further still. One thing that catches business owners off guard: New York doesn't allow the same carryback provisions that the CARES Act temporarily restored federally, so you can't assume a federal strategy automatically translates at the state level. New York City, as a separate taxing jurisdiction, requires its own analysis entirely. n State conformity is one of the most overlooked areas of tax planning for NYC-based business owners. At The Reed Corporation, we run the federal and New York State NOL calculations side by side so clients know exactly where they stand on both returns u2014 and don't get a surprise bill from Albany because a federal strategy didn't carry over the way they expected. n

Q: can I carry forward capital losses if my investments lost money this year?

n Yes. If your capital losses exceed your capital gains in a given year, you can deduct up to $3,000 of the net loss against ordinary income ($1,500 if married filing separately), and anything above that carries forward to future tax years indefinitely. The carryforward shows up on Schedule D and flows through Form 8949. There's no expiration on capital loss carryforwards, which is one of the few genuinely taxpayer-friendly rules in the code. You'll keep carrying it forward until it's fully used. n Character matters a lot here, and it's something most people miss. Long-term losses (assets held more than 12 months) first offset long-term gains, and short-term losses offset short-term gains, before any netting across categories happens. Since long-term gains are taxed at preferential rates u2014 0%, 15%, or 20% depending on income u2014 using a long-term loss to offset a long-term gain saves you less per dollar than using it to offset short-term gains taxed at ordinary rates. Strategic asset sales before year-end can shift which gains you're pairing with which losses, and that timing decision can be worth thousands. n Year-end tax-loss harvesting, done thoughtfully and with wash-sale rules in mind (you can't repurchase a substantially identical security within 30 days under IRC Section 1091), is one of the most practical ways investors reduce taxes over time. The Reed Corporation reviews clients' investment accounts every fall to identify harvesting opportunities before December 31, coordinating with their financial advisors when needed. n

You lost $80,000 in the stock market last year. Your tax return only let you deduct $3,000 of it against ordinary income. The other $77,000 didn’t vanish — it carried forward. But what does that actually mean, how does it work mechanically, and what happens to those losses if you never have enough gains to absorb them? The rules are more specific than most people realize, and getting them wrong means leaving money on the table or, worse, drawing IRS attention.

The $3,000 Capital Loss Limitation

When your capital losses exceed your capital gains for the year, you can deduct the excess against ordinary income — but only up to $3,000 per year ($1,500 if married filing separately) under IRC Section 1211(b). That limit hasn’t changed since 1978. It wasn’t indexed for inflation then, and it still isn’t. A limit that was worth something in 1978 dollars is almost laughable today, but it’s the law.

Anything beyond that $3,000 carries forward to the next year. And the next. And the next. There’s no expiration date for individuals — per IRS Publication 550, capital loss carryforwards last until you use them up or you die (more on that in a moment).

The ordering matters, though. Before you can deduct any losses against ordinary income, you have to net your short-term gains and losses against each other, net your long-term gains and losses against each other, and then net those two results. Only the final net loss, after all the internal netting, is subject to the $3,000 limit. If you have $50,000 in long-term losses and $45,000 in long-term gains, your net long-term loss is $5,000. If you have no short-term activity, you deduct $3,000 against ordinary income and carry forward $2,000. Not $47,000.

How the Carryforward Preserves Its Character

This is one of the details people miss: capital loss carryforwards retain their character as short-term or long-term under IRC Section 1212(b). A short-term loss that carries forward is still short-term in future years. A long-term loss that carries forward is still long-term. This matters because short-term losses offset short-term gains first (taxed at ordinary income rates), and long-term losses offset long-term gains first (taxed at preferential rates).

If you’re carrying forward $50,000 in long-term losses and you realize $50,000 in short-term gains next year, the long-term carryforward offsets the short-term gains — but only after netting within each category. The character preservation means your carryforward is more valuable when it offsets gains that would have been taxed at higher rates.

The Schedule D Capital Loss Carryover Worksheet (in the Schedule D instructions) walks through this calculation. Most tax software handles it automatically, but if you’re preparing your own return or reviewing your preparer’s work, understanding the character rules helps you spot errors. Our Schedule D explainer walks through the form line by line. We see mistakes here more than you’d expect, especially when clients switch tax preparers and the carryforward amounts don’t transfer correctly from the prior year.

Capital Loss Carryforwards: Unlimited Offset Against Gains

While the deduction against ordinary income is capped at $3,000, there’s no limit on how much carryforward you can use to offset capital gains. If you’re carrying forward $200,000 in losses from prior years and you realize $200,000 in gains this year, the entire carryforward absorbs the gains. Your net capital gain is zero, and you owe nothing on those gains.

This creates a planning opportunity. If you’ve accumulated large carryforwards from a bad year — a market crash, a concentrated stock position that cratered, a failed investment — the years that follow are the right time to take gains. Rebalance your portfolio, sell appreciated positions, realize gains that would normally create a tax bill. Our capital gains tax strategies guide covers the mechanics of gain realization in detail.

We see clients who lost heavily in a downturn and then sit on appreciated positions for years afterward, afraid to sell because of the tax bill. They’ve forgotten (or never knew) that they’re carrying forward $150,000 in losses that could absorb those gains completely. If that’s your situation, talk to your advisor. Those carryforward losses are an asset — use them before they expire (and yes, they can expire in a sense, as we’ll discuss below).

Net Operating Losses (NOLs) for Business Losses

Capital loss carryforwards are for investment losses. Business losses have their own carryforward mechanism: the net operating loss (NOL) under IRC Section 172. An NOL arises when your allowable business deductions exceed your gross income for the year. Self-employed individuals, sole proprietors, and pass-through entity owners can generate NOLs through their business activities.

Post-TCJA, the NOL rules changed significantly. For losses arising in tax years beginning after December 31, 2017:

No carryback. You can’t carry NOLs back to prior years under IRC 172(b)(1)(A) (with narrow exceptions for certain farming losses). Pre-2018 NOLs could be carried back 2 years and forward 20 years. That flexibility is gone.
80% limitation. NOL carryforwards can only offset up to 80% of taxable income under IRC 172(a) in the carryforward year. You’ll always pay tax on at least 20% of your income, even if your accumulated NOLs exceed your income. This was a major change — before 2018, NOLs could offset 100% of taxable income.
Indefinite carryforward. The trade-off for losing the carryback and the 100% offset is that post-2017 NOLs carry forward indefinitely. There’s no 20-year expiration anymore.

The 80% limit creates a perpetual tax floor that frustrates business owners who’ve had one terrible year followed by one great year. If you lost $500,000 in 2024 and earned $500,000 in 2025, you’d expect to break even on taxes. Instead, you can only use $400,000 of the NOL (80% of $500,000 income), leaving $100,000 taxable and $100,000 of NOL still on the books. You pay tax on money you haven’t really “made”. In aggregate. It’s the law, but it doesn’t feel fair.

The Excess Business Loss Limitation

Before your losses even become an NOL, they have to pass through another gate: the excess business loss limitation under IRC Section 461(l). For 2026, business losses exceeding $305,000 for single filers ($610,000 for married filing jointly) can’t be deducted in the current year. The excess becomes part of your NOL carryforward.

This rule was introduced by the TCJA, extended by subsequent legislation, and is currently scheduled to apply through 2028. It prevents high-income individuals from using large business losses to zero out their other income in a single year. The threshold is inflation-adjusted annually.

Here’s how it interacts with the NOL rules: if your business generates a $1 million loss and you’re single, only $305,000 is deductible in the current year. The remaining $695,000 becomes an NOL carryforward, subject to the 80% limitation when you use it in future years. Two separate limitations, applied sequentially, both reducing the immediate benefit of your losses. The tax loss harvesting guide covers the investment side of loss planning in more detail.

Tracking Carryforwards Across Years

Your carryforward is only useful if you track it accurately. The IRS doesn’t send you a statement showing your accumulated losses — that’s on you and your tax preparer. The Schedule D Capital Loss Carryover Worksheet calculates the amount that carries forward each year, and that number needs to flow correctly to the next year’s return.

When clients switch CPAs, this is one of the most common things that falls through the cracks. The new preparer doesn’t have access to the prior-year worksheets, the client doesn’t know to ask, and the carryforward gets lost. If you have carryforward losses, make sure your prior-year returns (especially the Schedule D worksheets) are part of any preparer transition. Pull transcripts from the IRS if you need to, but those don’t show the carryforward worksheets — they only show the amounts reported on the return itself.

For NOLs, the tracking is even more critical. You should maintain a running schedule showing the year each NOL was generated, the amount, how much has been used in subsequent years, and the remaining balance. Your CPA should be maintaining this for you. If they’re not, ask for it. Losing track of a six-figure NOL is a mistake that costs real money.

What Happens When a Taxpayer Dies

Capital loss carryforwards don’t transfer to heirs. When a taxpayer dies, any unused capital loss carryforward dies with them. It can be used on the decedent’s final return (the return for the year of death), but anything remaining after that is gone. A surviving spouse filing a joint return for the year of death can use the carryforward on that final joint return, but in subsequent years filing as single or surviving spouse, the deceased spouse’s carryforward is no longer available.

NOLs follow a similar rule. An individual’s unused NOL carryforward expires at death and cannot be inherited by heirs. It can be used on the final return, but that’s it.

This creates a planning issue for elderly taxpayers with large carryforwards. If someone has $300,000 in capital loss carryforwards and limited income, those losses are being eroded at only $3,000 per year. It would take 100 years to use them against ordinary income alone. The practical move is to realize gains — sell appreciated assets before death so the carryforward absorbs the gains tax-free. Otherwise, the carryforward disappears at death and the heirs get a stepped-up basis on the appreciated assets anyway (which is fine, but the carryforward is wasted). There’s no double benefit.

The wash sale rule is something to watch when realizing losses — but when you’re realizing gains to use carryforwards, the wash sale rule doesn’t apply (it only applies to losses). And for investment assets subject to capital gains tax, the carryforward is the most direct offset available.

Strategies for Years With Carryforwards

If you’re sitting on significant carryforward losses, the tax-smart move is to create gains in a controlled way. Rebalance portfolios with embedded gains. Convert a traditional IRA to a Roth IRA in a year when you have large carryforwards (the conversion income is ordinary income, and capital loss carryforwards can offset up to $3,000 of it per year, but you can pair the conversion with realized capital gains for a bigger benefit). Sell concentrated stock positions. Harvest gains the same way you’d normally harvest losses — just in reverse.

The worst thing you can do with a large carryforward is nothing. Letting it sit unused year after year, deducting $3,000 annually against ordinary income, means you’re effectively writing off a major tax asset in $3,000 increments. At that pace, a $100,000 carryforward takes over 33 years to use. If you die before then, the remainder vanishes. Be deliberate about using your losses — they’re a finite resource with an expiration event you can’t predict. For more tax-reduction strategies, see our guide on how to pay less in taxes legally.

Related Services from The Reed Corporation

Individual Tax ReturnsForm 1040 preparation with all schedules, attachments, and supporting forms. Corporate Tax ReturnsBusiness return preparation covering Forms 1120, 1120-S, and 1065. Tax AdvisoryYear-round guidance on form elections, filing positions, and IRS compliance.View All ServicesBrowse the full Reed Corporation service catalog.

Helpful Guides You Might Also Like

How Form 1040 WorksThe line-by-line guide to the federal individual return.All Helpful GuidesBrowse every tax guide by topic.Tax Strategy GuidesEntity choice, S-corp timing, retirement, and more.

Sources & References

IRS Publication 17Your Federal Income Tax About Form 1040U.S. Individual Income Tax Return 26 USCInternal Revenue Code (Cornell Law Institute)IRS Operations and Filing Season Updates

Frequently Asked Questions

how long can you carry forward a tax loss on your federal return?

Under current federal law, net operating losses (NOLs) generated after December 31, 2017 can be carried forward indefinitely — there’s no expiration date. You can’t carry them back anymore (with limited exceptions for farming losses and certain insurance companies), but you’ll never lose the deduction entirely. The catch is that you can only use the NOL to offset up to 80% of your taxable income in any given year. So if you have $100,000 in taxable income and a $200,000 carryforward, you can only deduct $80,000 this year, leaving $120,000 for future years.

Pre-2018 losses play by different rules. Losses from tax years before 2018 still carry the old 20-year limit and weren’t subject to the 80% cap — they could offset 100% of income. That distinction matters a lot if you’re sitting on older losses. Also, the CARES Act temporarily allowed a 5-year carryback for NOLs generated in 2018, 2019, and 2020, which gave some businesses a chance to get refunds on taxes paid in profitable prior years. If you missed that window, it’s gone — but it’s worth confirming you didn’t leave money on the table.

Tracking carryforward balances across multiple years, especially when pre- and post-2017 losses are mixed together, gets complicated fast. At The Reed Corporation, we keep a running schedule of each client’s NOL balance, vintage, and applicable rules so nothing gets misapplied on Form 1040 or 1120. If you’re not sure what you’re sitting on, that’s exactly the kind of thing a quick review can sort out.

can I use a business loss to offset my personal income on my tax return?

Yes, but it depends on how your business is structured and whether the loss clears a few hurdles first. If you’re a sole proprietor or single-member LLC, business losses flow directly onto Schedule C of your Form 1040 and can offset wages, investment income, or other personal income. S-corp and partnership losses pass through to your personal return too, reported on Schedule E — but only up to your basis in the entity. Losses beyond your basis get suspended, not lost, until your basis is restored in a future year.

Two rules trip people up: the at-risk rules under IRC Section 465 and the passive activity loss rules under IRC Section 469. Even if you have enough basis, you can only deduct what you’re economically at risk for. And if you’re not materially participating in the business — generally meaning fewer than 500 hours per year — the loss is considered passive and can only offset passive income, not your salary or interest income. There’s also the excess business loss limitation under IRC Section 461(l), which caps individual business losses at $305,000 for single filers and $610,000 for married filing jointly in 2024. Losses above those amounts get converted into an NOL carryforward.

These rules layer on top of each other, and missing one can mean an unexpected tax bill or a lost deduction. The Reed Corporation works through each layer for business-owner clients every year, making sure losses are being claimed correctly and that any suspended amounts are tracked and ready to use when the time is right.

what is a tax loss carryforward and how does it actually work?

A tax loss carryforward lets you take a loss from one year and apply it against income in a future year, reducing your tax bill down the road. The most common form is an NOL carryforward, which happens when your business deductions exceed your gross income for the year. You record the loss, carry it forward on your books and tax return, and then deduct it in future profitable years — subject to the 80% income limitation for post-2017 losses. It’s tracked on Form 1045 (for quick refunds) or directly on your Form 1040 or 1120 using the prior-year loss carryover worksheet.

Capital loss carryforwards work a bit differently. If your investment losses exceed your gains in a given year, you can deduct up to $3,000 against ordinary income annually and carry the rest forward indefinitely. There’s no 80% cap here, and the carryforward retains its character — long-term losses stay long-term, short-term stay short-term — which matters because they offset gains in a specific order. State rules add another layer of complexity. New York, for example, conforms to federal NOL treatment in some respects but has its own adjustments, and not every state follows the TCJA changes.

Most people don’t realize how much these carryforwards are worth until they have a big income year and suddenly need them. Keeping clean records of your loss balances, organized by type and year, makes a real difference. That’s something The Reed Corporation builds into every client’s year-end planning process.

does New York State follow federal tax loss carryforward rules?

New York conforms to federal NOL rules in some areas but not all, and the differences can cost you real money if you assume they’re the same. For individuals, New York generally follows the federal NOL calculation but requires you to recompute the NOL using New York-specific income modifications. Things like the federal qualified business income deduction under IRC Section 199A don’t exist in New York, so your state NOL can differ significantly from your federal one. You’ll report and track these separately on Form IT-203 or IT-201.

For corporations, New York has its own distinct NOL rules under the Article 9-A franchise tax regime. The state allowed a COVID-related NOL deferral program for certain tax years, and New York City has its own General Corporation Tax with rules that diverge further still. One thing that catches business owners off guard: New York doesn’t allow the same carryback provisions that the CARES Act temporarily restored federally, so you can’t assume a federal strategy automatically translates at the state level. New York City, as a separate taxing jurisdiction, requires its own analysis entirely.

State conformity is one of the most overlooked areas of tax planning for NYC-based business owners. At The Reed Corporation, we run the federal and New York State NOL calculations side by side so clients know exactly where they stand on both returns — and don’t get a surprise bill from Albany because a federal strategy didn’t carry over the way they expected.

can I carry forward capital losses if my investments lost money this year?

Yes. If your capital losses exceed your capital gains in a given year, you can deduct up to $3,000 of the net loss against ordinary income ($1,500 if married filing separately), and anything above that carries forward to future tax years indefinitely. The carryforward shows up on Schedule D and flows through Form 8949. There’s no expiration on capital loss carryforwards, which is one of the few genuinely taxpayer-friendly rules in the code. You’ll keep carrying it forward until it’s fully used.

Character matters a lot here, and it’s something most people miss. Long-term losses (assets held more than 12 months) first offset long-term gains, and short-term losses offset short-term gains, before any netting across categories happens. Since long-term gains are taxed at preferential rates — 0%, 15%, or 20% depending on income — using a long-term loss to offset a long-term gain saves you less per dollar than using it to offset short-term gains taxed at ordinary rates. Strategic asset sales before year-end can shift which gains you’re pairing with which losses, and that timing decision can be worth thousands.

Year-end tax-loss harvesting, done thoughtfully and with wash-sale rules in mind (you can’t repurchase a substantially identical security within 30 days under IRC Section 1091), is one of the most practical ways investors reduce taxes over time. The Reed Corporation reviews clients’ investment accounts every fall to identify harvesting opportunities before December 31, coordinating with their financial advisors when needed.