When an investor experiences a net loss from trades, he or she can carry over a portion of that loss to subsequent tax years. For instance, if you have a net trading loss this year, but a net profit next year, you can carryover a portion of your current year’s losses to reduce your taxable profit for the next year. The capital loss carryover limit is $3,000 per year, but you can carry forward losses indefinitely.
Assume a trader reports a net loss of $9,000 on traders in Year 1. Year 2, he reports $10,000 in capital gains. He is able to lower the taxed amount to $7,000 by carrying over $3,000 from Year 1. He still has $6,000 in losses to carry over to future years. Most accounting and self-filing tax software programs automatically carry over losses (when applicable) if you use the same system from year-to-year.
Some firms and traders engage in tax-loss selling to take advantage of loss carryover when they have a lot of unrealized losses at the end of the year.
*This definition is not tax advice. Consult with your accounting or tax attorney for more information.