Capital Loss Carryover and Business Losses

Capital Loss Carryover and Business Losses

Capital Loss Carryover

If your capital losses are greater than your capital gains, you may be able to deduct up to $3,000 per year against other income, or $1,500 if married filing separately.

Any unused capital loss can generally be carried forward to future tax years until it is used up.

For example, if you have a $10,000 net capital loss, you may be able to deduct $3,000 this year and carry the remaining $7,000 forward to future years.

Capital gains and losses are generally reported on Form 8949 and Schedule D (Form 1040).

For official IRS information, visit the IRS guidance on capital gains and losses.

Business Losses for YouTube, Blogging, Reselling, and Other Self-Employment

A YouTube channel, blog, online store, reselling business, or other self-employment activity may have a business loss when qualified business expenses are greater than business income.

There is no IRS rule that says a business can only claim losses for three years.

The IRS looks at whether the activity is being operated with a genuine intention to make a profit.

Examples of factors the IRS may consider include:

  • Whether you keep business records
  • Whether you operate the activity in a businesslike manner
  • Whether you spend time and effort trying to make the business profitable
  • Whether you change your business strategy when something is not working
  • Whether you have knowledge or experience related to the business
  • Whether the business has made profits in some years
  • Whether there is a reasonable expectation that the business can become profitable

Where the “3 Out of 5 Years” Rule Comes From

People sometimes misunderstand the IRS profit-presumption rule.

In general, if an activity earns a profit in at least 3 out of 5 consecutive years, the IRS may presume that the activity is being operated for profit.

However, this does not mean that a business automatically becomes a hobby after three years of losses.

A business may still have losses for several years if the owner can show that the activity is genuinely being operated with the intention of making a profit.

Example: YouTube Business

Someone may start a YouTube channel and spend money before the channel begins earning significant income.

Possible business expenses may include:

  • Camera equipment
  • Microphones
  • Lighting
  • Video editing software
  • Website hosting
  • Business-related subscriptions
  • Advertising
  • Freelancers or contractors
  • Office supplies
  • Internet or phone expenses related to the business

If the YouTube channel is genuinely operated as a business for profit, qualifying expenses may generally be reported as business expenses.

Many sole proprietors report business income and expenses on Schedule C (Form 1040).

If allowable expenses exceed business income, the business may report a loss, subject to applicable tax rules and limitations.

Business or Hobby?

The IRS distinguishes between a business operated for profit and an activity mainly done as a hobby.

A business is generally operated with the intention of earning a profit.

If an activity is considered a hobby instead of a business, the tax treatment is different and hobby losses generally cannot be used in the same way as business losses.

Keeping good records, separating business and personal expenses, tracking income and expenses, and having a clear plan for making the activity profitable can help show that the activity is being operated as a business.

Capital Loss vs. Business Loss

A capital loss and a business loss are different.

A capital loss usually occurs when you sell an investment or other capital asset for less than your cost basis.

Capital gains and losses are generally reported on:

Form 8949 and Schedule D

A business loss occurs when deductible business expenses are greater than business income.

Many sole proprietors report business income and expenses on:

Schedule C (Form 1040)

Important

Do not confuse a capital loss carryover with a business operating loss. They follow different tax rules and are reported on different tax forms.

For the most current rules, always check official IRS guidance or speak with a qualified tax professional.