How do capital gains and capital losses offset each other?

In general, capital gains and losses can offset each other. That means any capital gains can offset any capital losses. The following capital loss tax rules apply.

For example, a big capital loss on the sale of stock can be offset with a capital gain on the sale of real estate.

The rules for offsetting capital gains and capital losses are as follows:

First

Net short term capital gains against short term capital losses, including short-term amt capital loss carryforward from prior years).

Then

Net long term capital gains against long-term capital losses, (including long-term amt capital loss carryforward from prior years).

Finally

The net numbers, if opposite (capital gains or capital losses), are then netted against each other (e.g. a net long term capital gain and a net short-term capital loss, or vice versa).

If an investor has more capital losses than capital gains, up to $3,000 ($1,500 for married filing separately) of the net capital losses can be applied against ordinary income, dollar for dollar.

Any unused big capital loss may be carried forward indefinitely but may not be carried back. This is the amt of capital loss carryforward. JGTRRA 2003 did not change these capital gains and losses offset rules. (Special rules apply to losses on Section 1256 contracts.)