Can You Use Net Operating Losses to Offset Capital Gains?

Two Questions That Share One Name

People arrive here with one of two situations, and mixing them up is how most of the wrong advice on this topic gets written.

• Using an old loss. You had a genuine business loss in an earlier year, you carried it forward, and this year you sold stock, a house you do not live in, or a business, and you have gains. The question is how much of this year’s income the loss can erase. Answer: all of the ordinary layer first, then part of the gains, subject to the 80 percent wall.
• Making a new loss. You are in the middle of a bad year. The question is whether your Schedule D losses, your interest expense, your medical bills or your standard deduction push an ordinary loss into net operating loss territory. Answer: no, none of them can. Only deductions tied to a trade or business can, and the form takes the others back out.

The two halves are the same arithmetic in reverse, which is why they are one page and one tool rather than two.

Work It Out for Your Own Year

The 2026 Numbers This Page Uses

Filing status	Standard deduction	Top of the 0% gain band	Top of the 15% gain band	Investment loss allowed against ordinary income	Excess business loss threshold
Single	$16,100	$49,450	$545,500	$3,000	$256,000
Head of household	$24,150	$66,200	$579,600	$3,000	$256,000
Married filing jointly	$32,200	$98,900	$613,700	$3,000	$512,000
Married filing separately	$16,100	$49,450	$306,850	$1,500	$256,000

The two gain bands come from Rev. Proc. 2025-32 section 4.03, which prints the section 1(j)(5)(B) amounts for 2026. The standard deductions come from the same document, and so does the excess business loss threshold in section 3.31: $256,000, or $512,000 on a joint return. The $3,000 figure is the odd one out. It is set in section 1211(b), it has not been adjusted for inflation since 1969, and it is the only investment loss a year will ever let you deduct against wages.

Why Investment Losses Cannot Create a Net Operating Loss

Section 172(c) defines a net operating loss as the excess of deductions over gross income, and then section 172(d) lists what you have to remove from that excess before it counts. Two of those removals decide this question.

• Section 172(d)(2)(A). For a taxpayer that is not a corporation, the amount deductible on account of losses from sales or exchanges of capital assets cannot exceed the amount includable on account of gains from them. Read plainly: no gains, no capital losses in the net operating loss at all.
• Section 172(d)(4). Deductions that are not attributable to a trade or business are allowed only up to the gross income that is not derived from a trade or business. Your standard deduction is a nonbusiness deduction, so it can be absorbed by interest and dividends but it cannot on its own dig a loss.

Form 172 is the machine that enforces both, and it does it in a way that is easy to miss. Line 4 takes the investment loss above the investment gain. Line 9 takes your nonbusiness deductions above your nonbusiness income. Then line 24 adds those disallowed amounts back to your line 1 figure, which shrinks the loss to exactly the part the law is willing to call a business loss.

There is a second, subtler piece at lines 19 through 22. Your tax return already let you deduct $3,000 of net investment loss against ordinary income in arriving at adjusted gross income ($1,500 if you file separately), because that is what section 1211(b) allows. Form 172 line 19 identifies that amount and line 22 puts it back, so the $3,000 benefit you already banked cannot also enlarge a net operating loss. That is why the two cases below print the same loss even though one of them has a market crash in it.

Case	What the year looked like	Form 172 line 1	Line 9, disallowed nonbusiness deductions	Line 22, capital losses added back	Line 24, net operating loss	Investment loss carried to 2027
A	Schedule C loss of $15,000, nothing else	$-31,100	$16,100	$0	$15,000	$0
B	Same loss plus $9,000 of investment losses and $5,000 of interest	$-29,100	$11,100	$3,000	$15,000	$6,000
C	Same loss plus $20,000 of investment gains	$-11,100	$0	$0	$11,100	$0

Case A and case B produce the identical $15,000 net operating loss. The $9,000 of investment losses in case B changed nothing, and the $5,000 of interest income changed nothing either, because the $11,100 of disallowed nonbusiness deductions in line 9 moved in step with it. Case B does produce something else, and it is the useful part: the $6,000 of investment loss that was not allowed this year carries to 2027 under section 1212(b) in its own character. Next year it offsets capital gains dollar for dollar with no 80 percent cap and no $3,000 limit. If your problem is a gain, a capital loss carryforward is a better tool than a net operating loss, and it is worth checking which one you are actually holding.

Case C is the reverse, and it is the one people get wrong in the other direction. Investment gains are gross income, so a good year in the market reduces the net operating loss your business would otherwise have created: $11,100 instead of $15,000. Selling at a profit in a loss year is not free.

Wages Count as Business Income on Form 172, and That Changes Who Can Win Here

The instructions to Form 172 tell you not to put salaries and wages on line 7 with the dividends and pensions. Line 7 is for income that is not from a trade or business, and the instruction lists what belongs on the business side instead: salaries and wages, self-employment income, unemployment compensation, rental income, and gain on the sale of business real estate or depreciable property. On the deduction side, the instructions likewise treat rental losses, state income tax on business income, the deductible part of self-employment tax and self-employed health insurance as business deductions rather than line 6 items.

Two practical consequences follow, and neither appears on the pages that currently rank for this question. First, a W-2 employee whose only deductions are the standard deduction cannot get a net operating loss, because there is no trade or business for the deductions to attach to and the nonbusiness side is capped to the nonbusiness income. Second, someone who is on 1099 from a staffing agency, or who rents out the room they used to live in, is on the business side of the line, so an assignment that ends early and a Schedule C that swallows the pay can genuinely create one.

The 80 Percent Wall, Which Is the Real Answer to the Question in the Title

For a tax year beginning after 31 December 2020, section 172(a)(2) allows the sum of two things: losses arising in years that began before 1 January 2018, in full, and the lesser of the newer losses or 80 percent of taxable income computed without regard to the section 172 and section 199A deductions, minus whatever pre-2018 loss you used first. That is a mouthful, so put numbers on it.

• Taxable income before any loss deduction: $160,000, of which $70,000 is qualified dividends and long-term gain.
• The carryforward from 2018-and-later years: $200,000.
• The 80 percent wall: $128,000. That is the deduction you take, not $200,000.
• Still taxable after it: $32,000. Still carried forward: $72,000, indefinitely.

So the honest headline answer is: yes, but you cannot zero out the year. One fifth of a post-2017 loss year’s income always survives, and the rest waits for a future year. The exception is a loss from a year that began before 2018. Those are not capped at all, they can take a year to zero, and they expire 20 years after the year they arose (section 172(b)(1)(A)(ii)(I)), while post-2017 losses carry forward with no end date (section 172(b)(1)(A)(ii)(II)). If you are holding a pre-2018 loss, which is unusual now but real for farming and rental histories, it is normally the one to spend first and the one to double check for expiry.

Where the Deduction Lands When You Also Have Gains

This is the part that decides the size of the win, and almost nobody prices it. The qualified dividends and capital gain tax worksheet does not average your rates. It puts your ordinary income at the bottom of the rate stack and floats the preferential income on top of it, so the 0 percent band is used only after ordinary income has stopped filling it. A deduction taken off the total comes off the ordinary layer first.

Take a single filer with $60,000 of ordinary taxable income and $40,000 of long-term gain, spending a $50,000 carryforward from a 2018-or-later year.

• Deduction allowed: $50,000, and the 80 percent wall at $80,000 is not what binds here, since the loss is smaller than the wall.
• Taxable income after: $50,000.
• Federal tax falls from $13,912 to $1,083, a saving of $12,829.

Read that last bullet twice, because the saving is larger than a 22 percent haircut on $50,000 would suggest, and the reason is the stacking order. Every dollar of ordinary income the loss removes frees up a dollar of the 0 percent band for the gain. In this example $39,450 of the gain moves from 15 percent to 0 percent on the strength of the deduction, which is worth $5,918 on its own, on top of the tax on the ordinary income that disappeared. A net operating loss spent in a year with gains does two jobs at once. That is the strongest argument for timing a big realization into a carryforward year rather than a clean one.

The corollary is the warning in the tool. If the loss is big enough to eat all of the ordinary income and start on the gains, the preferential rates are lost on the dollars it touches, and you have paid for the deduction with the best rate in the code. In that situation it is usually better to take less of the deduction this year and carry the rest forward, or to reconsider which year you realize the gain in at all.

The Trap That Makes Part of a Business Loss Permanent for Years

Before a big business loss becomes a net operating loss at all, section 461(l) takes a bite out of it. For 2026 the threshold is $256,000, or $512,000 on a joint return, set out in Rev. Proc. 2025-32 section 3.31 and pointed to by the Form 172 instructions, which say simply that the threshold amount for your loss year is in the Instructions for Form 461.

An excess business loss is the amount by which total business deductions exceed total business gross income and gains plus that threshold. The Form 172 instructions state what happens next in one sentence worth memorizing: the excess is treated as a net operating loss to be carried forward, and when carryforwards can be used they can only offset 80 percent of taxable income in future years. A $1,000,000 Schedule C loss with no business income therefore becomes $744,000 of excess business loss, reported as a positive number on Schedule 1 so it cancels the same amount of the Schedule C loss on the current return, and carried to next year inside the loss bucket that is capped at 80 percent. The instructions require a specific worksheet, titled “NOL Carryover with an Excess Business Loss Worksheet”, to add the two amounts together, because what you carry is the loss plus the excess, not the loss alone.

Two more mechanics from the same instruction pages that matter for anyone farming or holding real estate: at-risk limits and passive activity limits are applied before the excess business loss figure, and a farming loss gets a 2-year carryback under section 172(b)(1)(B)(i) unless the taxpayer elects otherwise, which the statute describes as irrevocable for that year once made.

Where It Goes on the Return, and Why That Is Worth Something

A net operating loss deduction from an earlier year is entered on Schedule 1, line 8a, and the Instructions for Form 1040 tell you to enter it in the preprinted parentheses as a negative number, where it is subtracted from the other amounts on lines 8b through 8z. That makes it an adjustment to income, not an itemized deduction, so it reduces adjusted gross income rather than taxable income alone. Adjusted gross income is the starting number for most of the other tests in the code, so the knock-on effects are real, and they are the reason a preparer may want the loss used in a different year than the one you would pick.

Six Mistakes on This Topic

• Treating a market loss as a net operating loss. Section 172(d)(2)(A) says no, and Form 172 line 22 proves it arithmetically. What you have instead is a capital loss carryforward under section 1212(b).
• Counting the standard deduction as a source of loss. Line 9 takes it back.
• Booking the whole carryforward on line 8a. The 80 percent limit is the ceiling on the post-2017 bucket, and the amount above it is still there next year.
• Stacking an old loss into a new one. Line 23 exists precisely to add back the net operating loss deduction from other years, so it cannot enlarge this year’s figure (section 172(d)(1)).
• Using the wrong excess business loss threshold. The figure for the loss year is the one in that year’s inflation adjustment, and Form 461 has to be the revision for that year.
• Assuming a W-2 traveler has any of this available. Unreimbursed employee expenses are not deductible, so a traveler whose agency cancels a contract does not have a trade or business to lose money in. See the scrubs and work clothes page for what a W-2 filer can and cannot claim.

Frequently Asked Questions

Does the 80 percent limit apply to the whole carryforward? No. It applies to the part that came from years beginning after 31 December 2017. Losses from years beginning before 1 January 2018 are deducted in full, which is the one case where a year can be taken to zero. Section 172(a)(2)(A) and (B).

Can I carry a net operating loss back and get a refund? Generally no. A loss from a year beginning after 2017 carries forward only. Farming losses keep a 2-year carryback under section 172(b)(1)(B), subject to an election to give it up that cannot be withdrawn for that year, and insurance companies have their own rule. Losses arising in 2018, 2019 and 2020 had a 5-year carryback under section 172(b)(1)(D), which is a legacy provision at this point.

Does the loss change how much of my gain falls in the 0 percent band? Yes, and in your favor, as long as the loss does not run out of ordinary income to consume. Less ordinary income means more room below the $49,450 zero-rate ceiling for a single filer. That effect is priced into the calculator above rather than mentioned and skipped.

What is the difference between a net operating loss and a capital loss carryforward? A capital loss carryforward keeps its capital character forever: it can offset gains and $3,000 a year of ordinary income, and nothing else. A net operating loss is a deduction against all income, but it can only be made by a trade or business, and it can only be used against 80 percent of a year. People holding a large investment loss usually have the first thing and not the second.

Does an unused loss expire? Post-2017 losses carry forward indefinitely, until used up. Pre-2018 losses die 20 years after the loss year. Excess business losses are carried forward as part of the loss and inherit the same treatment.

Do states follow the federal net operating loss rules? Many start from federal taxable income and so pick up the deduction, but several impose their own limits or do not conform at all. That is a state-by-state question this page does not answer; a multi-state traveler should ask their preparer before assuming the federal number carries.

Can I file Form 172 myself for a small Schedule C loss? The form is short and the instructions are readable, and the calculator on this page follows its Part I line order. What it does not cover is a sale of business property, section 1202 small business stock, a partnership or S corporation share, or a farming carryback election. Any of those is a reason to have someone else run the numbers.

Sources

• Form 172, Net Operating Losses for Individuals, Estates, and Trusts (revised December 2024): the Part I line order the calculator follows: line 1, lines 4 and 5, lines 8 through 10, lines 15 and 16, line 19 with the $3,000 and $1,500 figures, line 22, line 23, and line 24
• Instructions for Form 172: what belongs on line 6 and line 7, including salaries, wages, self-employment income, unemployment compensation and rental income as business items; the excess business loss rules; the NOL Carryover with an Excess Business Loss Worksheet
• 26 U.S.C. 172, net operating loss deduction: the 80 percent limit in (a)(2)(B)(ii), the 20-year and indefinite carryforward periods in (b)(1)(A)(ii), the farming carryback and election in (b)(1)(B), and the capital loss and nonbusiness deduction limits in (d)(2)(A) and (d)(4)
• 26 U.S.C. 1211, limitation on capital losses: the $3,000 offset, $1,500 for a spouse filing separately, which section 1211(b) has never indexed
• 26 U.S.C. 1212, capital loss carrybacks and carryovers: a net capital loss carrying to the succeeding year in its own character under 1212(b)(1)
• IRS Rev. Proc. 2025-32: the 2026 rate tables in section 4.01, the 0 percent and 15 percent ceilings in section 4.03, the 2026 standard deductions, and the $256,000 and $512,000 excess business loss amounts in section 3.31
• Instructions for Form 461: the definition of an excess business loss and the threshold amount test, $313,000 and $626,000 as printed for 2025
• Instructions for Form 1040, Schedule 1: line 8a, where the net operating loss deduction from an earlier year is entered as a negative amount and subtracted from the other income lines

Next step: Figure the loss year first, then run the year you want to use it in. If the two answers do not line up with what a preparer tells you, bring the Form 172 line numbers from the first panel; that is the language they work in.