Capital Losses Offset Gains: How Carry Forward Works

How a capital loss reduces taxable gains

If you sell, swap, or otherwise get rid of an asset for less than what you originally paid, that's a capital loss. You can usually use it to offset capital gains in that same tax year. Only the net amount, that is, gains minus losses, gets taxed.

This only matters once the loss is realized, which is when you've actually disposed of the asset. A coin or bullion bar that has dropped in price but still sits in your account doesn't count as a deductible loss for tax purposes in most countries. You'll find the distinction between realized and paper losses in the guide to realized and unrealized gains. Prices for crypto and gold can swing unexpectedly, and losses are possible.

When losses are limited or ring-fenced

Countries handle capital losses in different ways. Some restrict them by category, so losses on one asset type can only offset gains from that same group. For instance, a crypto loss might only reduce crypto gains, nothing else. But in other places, any loss can be subtracted from any gain, no matter the asset type. Whatever is left after this netting process may then be matched with the capital gains tax allowance.

You may also see a cap on how much net capital loss can be set against your ordinary income in a year. Take the United States as an example: There's a specific limit for using net capital losses to reduce regular income. If you've got more loss than the cap allows, the leftover loss carries forward to future years. Carrying forward simply means that any unused loss is rolled over and can reduce gains in subsequent years.

Suppose you have gains on gold and losses on crypto

Let's say you made a 5,000 euro gain selling gold, but lost 2,000 euros on crypto sales in the same year. If your country lets you offset all losses against all gains, you'd pay tax on a net gain of 3,000 euros.

If, instead, crypto losses are ring-fenced, that 2,000 euro loss can only cancel out crypto gains, not your gold profit. The result is that your 5,000 euro gold gain is fully taxable (minus any allowance), and your unused crypto loss gets carried forward. These numbers are just for illustration, and you should remember that crypto and gold values can be unpredictable.

Carrying losses forward and avoiding wash sales

You'll want to keep clear and dated records of every realized loss, even if you didn't have gains that year. Many tax authorities require you to report a loss in order to use it sometime later. And unless you file it on your return, it might not count.

In some countries, you can't deduct a loss if you sell an asset at a loss and soon after buy it back. This is known as a wash sale, or sometimes bed-and-breakfasting. The rules behind that are in wash sale rules explained. Whether these apply to digital assets or physical metals depends on the country's tax code.

Frequently asked questions

Can capital losses reduce my income tax?

Sometimes they can, but it's normally limited. In the United States, for example, net capital losses can lower your ordinary income up to a certain annual amount, and any remaining loss carries forward to future years. In many countries outside the US, you'll find losses can only reduce other capital gains. Check local tax rules before making assumptions.

Do crypto losses count if I never cashed out?

No, not unless you've disposed of the asset. That means selling, swapping, or otherwise getting rid of it. Just holding a coin or token that's gone down in value doesn't usually lead to a deductible loss, at least in most places. The way losses are handled after a theft or failure of an exchange can be different, so ask your tax office or a professional adviser if that's your situation.