Netting capital gains and losses

You first classify your gains and losses as ordinary or capital. Within the capital category, you next distinguish between short term and long term treatment. If you have long term gains and losses, you must identify your 28% rate gains and losses. If you have a net capital gain, you must also identify any unrecaptured section 1250 gain.

Your holding period generally determines whether your capital gain or loss is short term or long term. Your capital gain or loss is generally long term if you hold the asset for more than one year before disposing of it, but beginning in 2018, certain gains involving your applicable partnership interests require a holding period of more than three years for long term treatment. Ownership lasting no longer than a year places your result in the short term category.

You use these classifications to arrive at your net capital gain or loss. The general holding period rule applies to both your capital gains and your capital losses.

To determine your net capital gain, subtract the year's net short term capital loss from that year's net long term capital gain. The definition compares your net amounts for the year.

You have a net capital gain when this annual subtraction leaves a positive remainder. A lower tax rate may apply to that gain than the rate that applies to your ordinary income.

A positive net capital gain also requires you to distinguish the unrecaptured section 1250 component. Long term results require you to separately recognize the gains and losses belonging to the 28% rate category.

If you are a taxpayer other than a corporation, you calculate your allowable capital loss deduction on Schedule D, Form 1040. Your deduction is the lesser of your total net loss shown on line 16 or $3,000. If you are married and file a separate return, you use $1,500 instead of $3,000.

You can use your total net loss to reduce your income dollar for dollar within the applicable limit. If your total net loss is smaller than that limit, your deduction is limited to your total net loss. Losses above the ceiling cannot increase your current deduction beyond $3,000, with a $1,500 ceiling for married taxpayers filing separate returns.

If you are a taxpayer other than a corporation, you can apply harvested losses to offset capital gains and up to $3,000 in ordinary income annually, subject to the $1,500 deduction limit if you are married and file a separate return. If you are a taxpayer other than a corporation, you can carry harvested losses that you cannot apply in a given tax year forward indefinitely to offset future income and capital gains, retaining their short term or long term character.

For purposes of the capital gain tax subsection, you calculate your 28% rate gain by comparing two totals. Your first total is your collectibles gain plus your section 1202 gain. Your second total is your collectibles loss, your net short term capital loss, and your long term capital loss carried to the taxable year under section 1212(b)(1)(B).

Your 28% rate gain is the excess, if any, of the first total over the second total. Your net short term capital loss and the specified long term capital loss carryover therefore enter this calculation along with your collectibles loss.

For purposes of the capital gain tax subsection, you increase your net capital gain, determined without the dividend provision, by your qualified dividend income. Under that provision, your qualified dividend income means dividends you receive during the taxable year from domestic corporations and qualified foreign corporations, subject to the exclusions and limitations below.

You exclude a dividend from a corporation that is exempt from tax under section 501 or 521 for the corporation's taxable year in which it makes the distribution or for its preceding taxable year. You also exclude any amount allowed as a deduction under section 591 and any dividend described in section 404(k).

You exclude a dividend on stock if you do not meet the holding period requirements of section 246(c), determined by substituting 60 days for 45 days wherever it appears and a period of 121 days for a period of 91 days. You also exclude dividends to the extent you are obligated, through a short sale or otherwise, to make related payments on positions in substantially similar or related property.

For your dividends, a qualified foreign corporation generally means a foreign corporation incorporated in a United States possession or eligible for benefits under a comprehensive United States income tax treaty. The Secretary must determine that the treaty is satisfactory for this provision, and the treaty must include an exchange of information program. If a foreign corporation does not otherwise qualify under those criteria, you treat it as qualified for a dividend if the stock paying that dividend is readily tradable on an established United States securities market.

For your dividend qualification, passive foreign investment company status under section 1297 disqualifies a foreign issuer if that status exists during either its payment year or the immediately prior taxable year. You also exclude a corporation that first becomes a surrogate foreign corporation, as defined in section 7874(a)(2)(B), after enactment of the relevant exclusion. That exclusion does not apply to a foreign corporation treated as domestic under section 7874(b).

You apply rules similar to section 904(b)(2)(B) for the dividend rate differential under this provision. Your qualified dividend income excludes amounts you take into account as investment income under section 163(d)(4)(B). Your dividends from a regulated investment company or real estate investment trust are subject to the limitations in sections 854 and 857.

If this section applies to you and you receive qualified dividend income on a share from one or more extraordinary dividends within section 1059(c), you treat a loss on selling or exchanging that share as long term capital loss to the extent of those dividends.

If you are a corporation with a net capital loss, you carry the loss back to each of the three preceding taxable years, subject to two restrictions. You can carry it back only to the extent it is not attributable to a foreign expropriation capital loss. Your carryback also cannot create or increase a net operating loss, as defined in section 172(c), for the year receiving the loss.

You carry your corporate net capital loss forward to each of the five succeeding taxable years, except for the portion attributable to a foreign expropriation loss. You carry that portion forward to each of the ten succeeding taxable years. You treat the loss as short term in each year to which you carry it.

You carry your entire net capital loss to the earliest eligible taxable year. For each later eligible year, you carry only the excess, if any, over the total capital gain net income of the earlier eligible years. You calculate that earlier capital gain net income without regard to the net capital loss for your loss year or any later taxable year.

If the net operating loss restriction prevents you from carrying your loss back in full to an earlier year, you apply an additional limit. You treat that earlier year's capital gain net income as no greater than the loss amount you can carry back under the restriction.