Does capitol loss carry forward only apply to future capitol gainsor can they be used to reduce earned income as well?

Answer 1

As you know, when you have a net capital loss for the year, you use the first $3000 of the loss as a deduction from ordinary income (ordinary income includes earned income) and carry the rest forward to the next year.

The amount you carry forward to the next year is treated exactly as if it were a capital loss that was incurred in the next year. For example, if you carry forward $10,000, it is treated exactly the same as if you sold a stock for a $10,000 loss in the year you carry it forward to.

That means that you first have to use it to offset any new capital gains in the year, then if there is any loss left, you apply up to $3000 against ordinary income, then if there is still any left, you carry it forward to the year after that.

Always fill out the capital loss carryover worksheet in the Schedule D instructions to determine how much you have carried over. Never assume you know the right amount before filling out the worksheet. Even though you may have to enter -$3000 on the front of Form 1040, that does not always mean you have used up $3000 of your loss.