How is the deduction for capital losses limited for individual taxpayers?

How is the deduction for capital losses limited for individual taxpayers?

• A. To the lesser of $2,000
• B. To the lesser of $3,000
• C. To the total amount of loss incurred
• D. To the amount exceeding capital gains

Answer: (B)

The deduction for capital losses for individual taxpayers is limited to the lesser of $3,000 or the total amount of net capital losses. This means that if a taxpayer has incurred capital losses that exceed their capital gains, they can only deduct up to $3,000 of those losses against other income, such as wages or salaries, in a single tax year. If the total net capital loss is greater than $3,000, the excess can be carried forward to future tax years, where it can continue to offset capital gains in those years or up to the $3,000 limit against other income. This rule ensures that while taxpayers can benefit from their losses, there is a cap on the immediate deduction to prevent significant offsets against ordinary income that could substantially reduce taxable income in a given tax year.

The deduction for capital losses for individual taxpayers is limited to the lesser of $3,000 or the total amount of net capital losses. This means that if a taxpayer has incurred capital losses that exceed their capital gains, they can only deduct up to $3,000 of those losses against other income, such as wages or salaries, in a single tax year.

If the total net capital loss is greater than $3,000, the excess can be carried forward to future tax years, where it can continue to offset capital gains in those years or up to the $3,000 limit against other income. This rule ensures that while taxpayers can benefit from their losses, there is a cap on the immediate deduction to prevent significant offsets against ordinary income that could substantially reduce taxable income in a given tax year.