Capital losses can be carried forward for eight assessment years and set off against future capital gains - a well-known rule that hides an asymmetry most investors only discover when they try to use a loss and find it doesn’t apply where they expected.
- A short-term capital loss can be set off against a capital gain of either kind - another short-term gain, or a long-term one.
- A long-term capital loss can only be set off against a long-term capital gain. It cannot reduce a short-term gain, no matter how large that short-term gain is or how small the long-term gain available to absorb the loss.
Short-Term Losses Are the Flexible Ones
The asymmetry runs only one way - short-term losses are the more flexible of the two, not the more restricted one, which is the opposite of what the usual “long-term is the favoured category” framing around capital gains tax rates might suggest. An investor sitting on a large short-term gain and a long-term loss from a separate holding can find the loss simply can’t be used against that year’s biggest gain, and has to wait for a long-term gain to show up, within the eight-year window, to use it at all.
Filing Late Extinguishes the Carry-Forward Entirely
The carry-forward itself has one hard, absolute condition attached: the loss has to be reported in an income tax return filed by the original due date. File late, even by a day, and the right to carry the loss forward is gone permanently - not reduced, not delayed, extinguished. A genuine loss that could have offset gains for up to eight years becomes worth nothing the moment the return misses its deadline, regardless of how accurately everything else on the return is reported.
File by the original due date, whatever else is unresolved. The asymmetry between loss types is worth planning around; the filing deadline is not a planning matter at all - miss it by a day and eight years of offset capacity is gone permanently.
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