Question 1
A taxpayer's 2023 federal return shows a net capital loss of $8,200. The taxpayer had no capital gains in 2023. How much of the capital loss can the taxpayer deduct on the 2023 return, and how much carries over to 2024?
Option B is correct. Under IRC § 1211(b), individual taxpayers may deduct a net capital loss of up to $3,000 per year against ordinary income, with the remaining balance carried forward to subsequent tax years.
Reason
Under IRC § 1211(b), an individual taxpayer who has a net capital loss may only deduct up to $3,000 ($1,500 if married filing separately) against ordinary income in any single tax year. The excess capital loss carryover — in this case $8,200 − $3,000 = $5,200 — is carried forward indefinitely to future tax years under IRC § 1212(b), retaining its character as short-term or long-term. Because the taxpayer had no offsetting capital gains in 2023, the full $3,000 limitation applies and the $5,200 balance rolls into 2024.
Why the other options are not as suitable
- Option A is wrong because no provision of the Internal Revenue Code allows an individual to deduct the entire $8,200 net capital loss in a single year absent offsetting capital gains; the annual cap under IRC § 1211(b) is $3,000.
- Option C is wrong because the taxpayer is not required to forgo the deduction entirely — up to $3,000 is deductible in 2023 against ordinary income even with zero capital gains.
- Option D is wrong because there is no rule splitting the loss equally across two years; the statute imposes a flat $3,000 annual ceiling, not a 50/50 proration.