Principales conclusiones
- Reducing Your Tax Burden: Long term losses can be used to offset both long term and short term gains. When you sell an investment held for more than a year at a loss, the IRS allows you to apply that loss against your short term gains, which are taxed at higher rates. This can help reduce your overall tax burden.
- About Short-Term and Long-Term Losses: The IRS has an order of operations for matching gains and losses. First, long term losses offset long term gains, and short term losses offset short term gains. If you have any remaining losses, they can be used to offset gains of the opposite type, meaning long term losses can reduce short term gains.
- Better Keep Track of Your Losses: If your total losses exceed your gains, you can deduct up to $3,000 against your ordinary income ($1,500 if you are married filing separately). Any remaining losses can be carried forward to offset future gains or ordinary income in subsequent tax years.
- Keep Things Balanced, Always: Short term gains are taxed at your ordinary income tax rate, which can be as high as 37% in 2025. Since long term losses can offset these gains, they can effectively reduce your tax liability at a higher rate, making this strategy particularly advantageous for high-income investors.
- Circling Back On the Wash Sale Rule: The wash sale rule can disqualify your capital loss deduction. If you sell an investment at a loss and then repurchase the same or a substantially identical security within 30 days, the loss will be disallowed for tax purposes. This can limit your ability to offset short term gains.
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Can Long Term Losses Offset Short Term Gains?
When it comes to investing, taxes play a significant role in determining how much of your profits you actually keep. If you buy and sell stocks, mutual funds, or other investments, you will eventually face either gains or losses, and understanding how they interact is essential for managing your tax liability. One common question that arises is: can long term losses offset short term gains? The short answer is yes, but the way it works is not always straightforward.
In this article, we will break down how long term losses and short term gains are taxed, how they can offset each other, and the strategies you can use to minimize your tax bill.
Understanding Long Term Losses and Short Term Gains
Before diving into how they offset each other, it is important to understand the difference between long term and short term capital gains and losses.
A long term gain or loss comes from selling an investment that you have held for more than one year. In 2025, long term capital gains are taxed at preferential rates of 0%, 15%, or 20%, depending on your income level. These rates are significantly lower than the tax rates applied to ordinary income.
On the other hand, short term gains result from the sale of investments held for one year or less. They are taxed at your ordinary income tax rate, which can be as high as 37% for high earners in 2025. Because short term gains are taxed at a higher rate, they can create a bigger tax burden, making it beneficial to offset them with losses.
Long term losses occur when you sell an investment you have held for over a year at a lower price than what you paid. These losses can be used to offset both long term and short term gains, which can help reduce your taxable income.
How Long Term Losses Offset Short Term Gains
When you sell investments at a loss, you can use those losses to offset your capital gains. The IRS has a specific order in which gains and losses are applied:
- First, long term losses are applied against long term gains.
- Next, short term losses are applied against short term gains.
- Finally, if you have any remaining losses, you can use them to offset gains of the opposite type. This means that if you have more long term losses than long term gains, the excess can be applied to reduce your short term gains.
For example, if you have $10,000 in short term gains but $12,000 in long term losses, you can use $10,000 of the long term losses to completely offset your short term gains, leaving you with no taxable capital gain. The remaining $2,000 in long term losses can then be used to offset other gains or be deducted against your ordinary income, up to the annual limit.
Capital Loss Deduction Limits
Si su total capital losses exceed your total capital gains, you can use the excess losses to offset your ordinary income. For 2025, the IRS allows you to deduct up to $3,000 of net capital losses ($1,500 if you are married filing separately) from your ordinary income.
If you still have losses beyond this limit, they can be carried forward into future tax years. This carryover allows you to continue using excess losses to offset gains or ordinary income in future years, helping you reduce your tax burden over time.
Tax Strategies Involving Losses and Gains
Offsetting short term gains with long term losses is a common tax-saving strategy. Here are some key strategies to consider:
- Tax-loss harvesting: This is the practice of selling underperforming investments to realize capital losses, which can then be used to offset gains. Investors often use this strategy near the end of the year to minimize their tax bill.
- Strategic rebalancing: If you have profitable short term investments, consider selling long term underperforming assets with losses to offset the gains. This can help you reduce or eliminate the tax impact of the short term gains.
- Loss carryforwards: If you accumulate large losses in one year, you can carry them forward to offset future gains, providing ongoing tax benefits.
- Avoiding the wash sale rule: If you sell a losing investment to claim a tax benefit, be careful not to repurchase the same or a substantially identical security within 30 days before or after the sale. Doing so could trigger the wash sale rule, disallowing the loss deduction.
Impact of the 2025 Tax Code Changes
As of 2025, the capital gains tax brackets are projected to remain similar to previous years, with long term gains taxed at 0%, 15%, or 20%, based on income. However, with potential changes to overall tax policy, investors should stay informed about any modifications to capital gains rules, deduction limits, or tax rates.
Additionally, the $3,000 limit on capital loss deductions against ordinary income is still in effect for 2025, and unused losses will continue to be eligible for indefinite carryforward.
Common Mistakes to Avoid
When offsetting gains with losses, it is easy to make tax filing mistakes. One common error is incorrectly calculating your holding period. Remember that the one-year threshold for short term versus long term treatment is based on the purchase date, not the settlement date.
Another common mistake is failing to consider the wash sale rule. If you repurchase a security too soon after selling it at a loss, you could lose the tax benefit of the loss.
Lastly, some taxpayers overlook the ability to carry forward excess losses, which can lead to missed tax-saving opportunities in future years.
Can Long Term Losses Offset Short Term Gains: The Final Word…
The ability to offset short term gains with long term losses is a valuable tax planning strategy. Since short term gains are taxed at higher rates, using long term losses to reduce or eliminate them can significantly lower your tax bill. By understanding how capital gains and losses interact, leveraging tax-loss harvesting, and properly applying the IRS rules, you can make the most of your investment-related tax deductions.
In 2025, with tax rates and rules still favoring long term investments, offsetting short term gains with long term losses remains a practical and effective way to minimize your tax liability.
Can Long Term Losses Offset Short Term Gains?: FAQ
1. How do long term losses offset short term gains?
Long term losses can reduce or completely offset short term gains by applying the loss amount against the taxable gain. When you sell an investment at a loss after holding it for more than a year, the IRS allows you to first apply that loss to any long term gains. If you have more long term losses than long term gains, you can then use the remaining losses to offset short term gains.
Since short term gains are taxed at higher rates (your regular income tax rate), using long term losses to offset them is particularly beneficial. If you still have losses left over after offsetting all your gains, you can deduct up to $3,000 against your ordinary income and carry forward any excess losses to future years.
2. Is there a limit to how much loss I can use to offset gains?
There is no limit on how much you can offset capital gains with capital losses. If you have enough long term losses, you can completely cancel out your short term gains. However, if your total losses (including both short and long term) exceed your total gains, you can only deduct up to $3,000 against your ordinary income for the year ($1,500 if married filing separately). Any remaining losses beyond this limit are carried forward to future years indefinitely, where they can continue to offset gains or ordinary income.
3. What is the difference between long term and short term gains and losses?
Long term gains and losses apply to investments you have held for more than one year. They are taxed at lower, preferential rates of 0%, 15%, or 20%, depending on your income level. Short term gains and losses, on the other hand, involve investments held for one year or less and are taxed at your ordinary income tax rate, which can be as high as 37% in 2025. The ability to offset short term gains with long term losses is valuable because it allows you to reduce your tax burden on gains that would otherwise be taxed at a higher rate.
4. What happens if I have more losses than gains in a year?
If your total capital losses exceed your capital gains, you can use the excess to reduce your taxable income. The IRS allows you to deduct up to $3,000 of capital losses against your ordinary income ($1,500 if married filing separately). Any unused losses beyond this limit can be carried forward to future tax years. This carry forward allows you to continue using the losses to offset future gains or income, potentially lowering your tax liability in subsequent years.
5. What is tax-loss harvesting, and how does it relate to offsetting short term gains?
Tax-loss harvesting is a tax strategy where investors intentionally sell underperforming investments to realize capital losses. These losses can then be used to offset short term gains, reducing taxable income. This is a popular year-end strategy because it helps minimize the tax impact of profitable trades made earlier in the year. However, it is important to avoid violating the wash sale rule, which could disqualify the loss deduction. By strategically timing the sale of losing investments, you can effectively reduce your tax bill on short term gains.
6. How does the wash sale rule affect my ability to offset short term gains?
The wash sale rule prevents you from claiming a capital loss deduction if you sell a security at a loss and then repurchase the same or a substantially identical security within 30 days before or after the sale. If you violate this rule, the loss will be disallowed for tax purposes. Instead of applying the loss to offset gains, the disqualified loss amount is added to the cost basis of the newly purchased security.
This rule is designed to prevent investors from selling investments just to claim a tax benefit while still maintaining the same position. To avoid triggering the wash sale rule, make sure to wait at least 31 days before repurchasing the same or a substantially identical investment.
Jacob Dayan
Entrepreneur • CEO Community Tax, LLC
Jacob Dayan is the CEO and co-founder of Community Tax LLC, a leading tax resolution company known for its exceptional customer service and industry recognition. With a Bachelor’s degree in Business Administration from the University of Michigan’s Ross School of Business, Jacob began his career as a financial analyst and trader at Bear Stearns and Millennium Partners before transitioning to entrepreneurship. Since 2010, he has led Community Tax, assembling a team of skilled attorneys, CPAs, and enrolled agents to assist individuals and businesses with tax resolution, preparation, bookkeeping, and accounting. A licensed attorney in Illinois and Magna Cum Laude graduate of Mitchell Hamline School of Law, Jacob is dedicated to helping clients navigate complex financial and legal challenges.
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