Capital loss carryover is an important concept for investors in the stock market to understand. It is a tax strategy that allows you to write off losses from the sale of stocks and other securities on your income tax return.

When you sell a security for less than you paid for it, the resulting loss is known as a capital loss. Capital losses may be used to offset capital gains in the same tax year, but if the loss exceeds the gain, the excess may be carried forward for use in future years. This is called capital loss carryover.

Under the current IRS rules, capital losses that exceed capital gains in a year may be used to offset up to $3,000 in ordinary taxable income in any one year. The remaining excess, or any unused portion, may then be carried forward indefinitely until the amount is exhausted. The rules also allow an unlimited carryforward of capital losses incurred in 2018 and later tax years.

It’s important to note, however, that the IRS also has a wash-sale rule, which states that investors cannot repurchase a security that was sold for a loss within 30 days of the sale. If you do, the capital loss does not qualify for the beneficial tax treatment, and the amount of the loss must be added to the basis of the new security.

For investors, understanding the concept of capital loss carryover is essential for ensuring the most beneficial tax treatment for their investments. By taking advantage of this tax strategy, investors can minimize their tax liabilities and maximize their long-term profits.