When capital losses exceed capital gains in a given tax year, California allows taxpayers to deduct a portion of the loss against other income. The maximum deduction is $3,000 for single filers or $3,000 for those filing jointly. Any excess loss is carried forward to future tax years. The calculation involves determining the net capital loss (total capital losses minus total capital gains) and then applying the $3,000 limitation. For example, if an individual experiences a net capital loss of $8,000, they can deduct $3,000 in the current year, resulting in a $5,000 capital loss carryover.
The ability to carry forward these losses is significant because it allows taxpayers to offset future capital gains or deduct losses against ordinary income in subsequent years, potentially reducing their overall tax liability. This provision of California tax law provides a means to recover some financial benefit from investment losses and encourages continued investment activity within the state. Previously, such losses would have been irrecoverable after the initial tax year.
