IRS Rules on Netting Long-Term Gains Against Short-Term Loss
Almost any business property -- patents, buildings, manufacturing equipment, a subsidiary company -- may qualify as a capital asset. When you sell it, you report the gain or loss to the IRS. If you hold the assets less than a year, you pay regular income-tax rates. Taxes on long-term capital gains are usually lower. If you have multiple capital sales, you have to combine the gains and losses to figure your capital gains tax.
If your company sells both long- and short-term capital assets, your first step is to net sales in each category together. Using Form 8949, you add together all the year's sales of long-term capital investments such as business real estate or factory equipment. You report the total gain or loss from long-term sales on the form. Then you do the same with your short-term sales on a separate section of the form. If you have net gains in both categories, it's simple: you report both totals on Schedule D and pay the appropriate tax rate on each gain. If you have a long-term gain and a short-term loss, or vice-versa, you have to net the two together.
Schedule D is where you net your long-term and short-term gains and losses. You report various categories of short-term sales in the first part of the form, then long term in Part II, then add them together. If the company has, say, $10,000 in long-term gains and $8,000 in short-term losses, you have a $2,000 net long-term capital gain. If the numbers are reversed, you have a $2,000 net short-term loss. You report the total gain or loss on your Form 1040.
Certain types of long-term gain get a special tax rate. If, say, you buy up another company's stock and hold it for at least five years before selling, some of the gains are exempt from tax; the remaining gains are taxed at 28 percent. If you have several such sales, you net them together separately from any other capital sales. Then you net the total special-rate sales in with the total from regular long-term sales. If you have, say, a $2,000 taxable gain at 28 percent and a $500 loss at a lower rate, you end up with a $1,500 gain taxed at 28 percent.
If you end up with a net short-term loss under $3,000, you can subtract it all from your company's taxable income, at least until you wipe out your income. The same rule applies to a net long-term loss. If your loss this year adds up to more than $3,000, you have to carry the excess forward. On a net $4,800 short-term loss, for instance, you deduct $3,000, then carry forward $1,800. If you have multiple losses from multiple years, you can carry them all forward, but you have to keep net long-term and short-term losses separate.
Suppose your company has a $4,500 long-term capital loss you've been carrying forward for several years, then you incur a net $1,800 short-term loss you have to carry forward too. On the next tax return, you subtract your losses from your capital gains just as if you'd incurred them in the same year. If you still have red ink, you can subtract up to $3,000 from any non-capital income, then carry the rest forward again. If you can't subtract the entire amount, you employ the short-term loss before any of the long-term losses. It doesn't matter which loss you incurred first; short-term loss is always subtracted first.