Preserving Capital Loss Carryovers
The question frequently arises whether or not an individual must file a return, even if not otherwise required to file, in order to preserve a capital loss carryover.
In reading the IRS instructions, it appears the answer is now based upon the following statement that appears in IRS Publication 550 (2020, page 66).
However, to claim a capital loss carryover the Schedule D instructions indicate the taxpayer needs a copy of their prior year 1040 and Schedule D to complete the capital loss worksheet to determine how much loss is carried forward from the prior year.
In figuring the carryover, the amount of the capital loss carryover is the amount of taxpayer’s total net loss that is more than the lesser of the taxpayer’s:
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Allowable capital loss deduction for the year ($3,000), or
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Taxable income increased by the taxpayer’s allowable capital loss deduction for the year and for years other than 2018 through 2025, the taxpayer’s deduction for personal exemptions.
Bottom line, there appears there is no actual requirement to file a return, where one is not otherwise required to be filed. However, since the carryover is based upon the results of a prior year return, the taxpayer would have to be able to reconstruct the prior year return to prove the carryover if challenged on the amount of the carryover.
Best Practice - That leads us to believe that the best practice may be to actually file a return and run the statute of limitations even though it is not actually required.