Can you use more than $3,000 of investment losses in a year?

Where the $3,000 number comes from

Many people have heard that capital losses, meaning losses on investments you sold, are limited to $3,000 a year on your taxes. So they figure a losing investment is only worth $3,000 to them, and they leave it alone. That can mean paying tax on gains the loss could have canceled out.

How the rule actually works

When you sell an investment at a loss, that loss first cancels out your gains, dollar for dollar, with no limit. Say you sold one investment for a $20,000 gain and another for a $20,000 loss. The two cancel out, and you owe no tax on that gain.

The $3,000 only comes in when your losses are bigger than your gains. The leftover loss can lower your other income, like wages or retirement account withdrawals, by up to $3,000 a year ($1,500 if you’re married filing separately). Anything beyond that carries forward to future years until it’s used up.

What to know before you sell

• This only works in a regular taxable account. Losses inside an IRA or 401(k) don’t count.
• If you buy the same or a substantially identical investment within 30 days before or after the sale, the wash sale rule can disallow the loss for now.
• Selling at a loss on purpose to offset gains is called tax-loss harvesting, and it works best when it’s planned before the year ends.

How we handle it

At Sansone CPA & Financial, we coordinate your tax, investment, and retirement decisions so a losing investment may still do some good on your tax return.