In Year 1, Taxpayer T had a net short-term capital loss of $2,000 and a net long-term capital loss of $4,000. T had no capital gains. What amount of capital loss can T deduct in Year 1, and what is the carryforward?

Answer options:

Deduct $3,000; Carryforward $3,000 long-term.

Deduct $3,000; Carryforward $2,000 short-term and $1,000 long-term.

Deduct $3,000; Carryforward $1,000 short-term and $2,000 long-term.

Deduct $6,000; Carryforward $0.

How to approach this question

1) Max deduction is $3,000. 2) Use Short-Term first. 3) Use Long-Term next. 4) Carry forward the unused portion retaining its character.

Full Answer

A.Deduct $3,000; Carryforward $3,000 long-term.✓ Correct

An individual can deduct up to $3,000 of net capital losses against ordinary income. Short-term losses are used first. T has $2,000 STCL and $4,000 LTCL. T uses the full $2,000 STCL and $1,000 of the LTCL to reach the $3,000 limit. The remaining $3,000 ($4,000 - $1,000) is carried forward as a Long-Term Capital Loss.

Common mistakes

Using Long-Term losses first or mixing up the carryforward character.

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