This is how I understand capital gains carry over. If you have evidence that proves me wrong--and thus my CPA--please do post links.
There is a lot of confusion about how much capital loss you can carry over to the next year. The IRS doesn't make it easy to figure out what is going on. CPA's understand it, but individual investors may not, and even Turbo Tax and others give erroneous information about how much you can carry over.
I can't find any explicitly stated information on the IRS website. I believe that's for a reason. However, you can carry over ALL of your capital gains losses from a previous year to the current year, up to your capital gains total. I think Zack's puts it as clearly as you will find it anywhere:
You can use a maximum of $3,000 of capital losses each year as a write-off against income other than capital gains. If your losses are greater than your gains by more than $3,000, the extra losses above the $3,000 limit should be carried forward to future tax years. In the next tax year, the carry forward loss would again be first used against capital gains, and another $3,000 of excess would reduce other income. For a large loss and no capital gains, your loss will carry forward indefinitely with a $3,000 reduction in the carry amount each year until it is at zero.*
However, About.com Money makes it EXPLICITE:
Any capital loss that is not used in the current year can be carried over indefinitely to offset future capital gains.Example: If you have $10,000 of capital loss, after using $3,000 to offset ordinary income, $7,000 will carryover to the next year. Next year, if you have $5,000 of capital gain, you can use $5,000 of your loss carryover to offset this gain, and use the remaining $2,000 to offset ordinary income.*
Most people think the carry over of 3, 000 is total carry over, but that's only for income OTHER than capital gains.
That's because this is about as clear as I can find any IRS document stating the above. It's cryptic, confusing, bad sentence structure, and leaves so much out that it cannot be determined, because they give you no clear examples. This is how our IRS states it for you:
If your capital losses exceed your capital gains, the amount of the excess loss that you can claim on line 13 of Form 1040 to lower your income is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss shown on line 16 of the Form 1040, Schedule D (PDF), Capital Gains and Losses. If your net capital loss is more than this limit, you can carry the loss forward to later years.
You see that? CAPITAL LOSS vs ORDINARY INCOME = CARRY THE LOSS TO LATER YEARS. They give no maximum number for carry over of capital losses applied to capital gains and they mix both ordinary income and capital income into the same bag, without clarifying each separately.
Of course, this is what they mean: If your capital losses exceed your capital gains, then you can apply up to 3K (1500 joint filing) to ordinary income in any current of future years, and the total amount of losses to your net capital gains in future years.
Let me make this really clear--this IRS sentence is incomprehensible without explanation, or insider information, and for a number of reasons (one listed above). For instance, the confusion of (1) Capital gains deduction and (2) Ordinary income deductions. (2) Sentence structure? that's a 60 word sentence people! Wow, really, a 60 word sentence? I feel like I'm back in the Victorian age where entire pages were single sentences comprised of sentences linked by semicolon after semicolon. (This is either intentional obfuscation, or simply incompetent communication skills.)
Additionally, they don't tell you how much capital gains loses can be applied to future years, and the way it is worded, people assume it's 3, 000. But that's for ordinary income. Why all of the subterfuge, IRS? This is one reason we hate tax time--we can't even get a clear picture of the rules! (And you thought investing was hard!).
When I was at university, I tutored, and if I got a sentence like that, I would not even try to assume what it meant. I would simply return it to the student with a red abbreviation "SS" (sentence structure). So let me give a few examples.
In 2013 you have 10K in capital losses (equities). You have no capital gains. So you have up to 10K in losses you can carry over to 2014. That's right, as long as you apply it to CAPITAL gains in 2014.
Many IRS documents and other sources make it sound like you can only carry over 3K. But if you read the IRS document very carefully, although not explicit, you will see that the carry over of 3K only applies to anything in excess of your capital gains.
2013: 10K Capital Gains loss
2014: 10K Capital Gains
You can deduct the entire 10K from your 2014 capital gains.
The confusion comes because you can also use a capital gain loss on your ORDINARY income, from wages or salaries, for instance. However, you are limited to applying 3K per year to your ORDINARY income Y/Y.
2013: 10K capital losses, no capital gains, and no ordinary income.
2014: 7K capital gains and 20K ordinary income.
You can deduct 7K of losses applied to your 2014 capital gains, and then you can deduct up to an additional 3K from your ordinary income.
(1) Capital Burn Rate: If you have booked a loss in capital gains the previous year, you must use 3, 000 of it in the following year--or you lose it. That's right! The IRS burns 3K per year of your previous year's losses if you don't use it. So if you have two consecutive capital gains losses Y/Y, and you have no ordinary income, you lose 3K of losses from the previous years loss (The IRS hates losers, I guess).
(2) Short Term Capital Loss: Short term capital losses only stay on the books for the next year. If you can't use them then, you lose them--all of them. So let's say you had a net loss in short term capital gains of 100K. The next year, you make 50K in capital gains. You can only apply 50K of the previous years loss, plus 3K for ordinary income if you have it, and you eat the short term 47-50K loss.
I know, it's convoluted, not fair, and the IRS doesn't explicitly state these thing--or it's buried beyond my ability to find it stated explicitly. However, the IRS is much smarter than I am, so maybe for some seemingly strange and sophistical reason, but beyond my logical ability to comprehend, we should not understand our taxes clearly. You get my drift? So why doesn't the IRS write more clearly? Perhaps its the same phenomenon one philosopher explained about his own writing when questioned by a grad student. "Why don't you write more clearly, professor?" "Because I don't think more clearly!" Either that, or it's something like this:
(Head IRS Agent): "That's far too clear. Anyone can understand that!"
(IRS Agent 2): "I agree. It doesn't sound convoluted at all and people will understand our tax laws."
(IRS Agent 3): "Indeed, indeed, gentlemen. The IRS must come across as much more highfalutin than that. Imagine, using sentences confined to 20 or less words! Ridiculous!"
(IRS Agent 4): "Agreed, not to mention specific examples for each specific rule! Our tax rules should be a lifelong process, whereby each year individuals and institutions must go through a sort of IQ test in order to deduce our rules."
(Head IRS Agent): "Then it's agreed! Close the curtain, and Dorothy, get your stinky little dog out of here!"
Additional disclosure: I am not a CPA or legal tax accountant. Do your own research. However, my CPA applied my entire 6500 loss in 2013 to my 2014 gains. If I'm wrong, then he is too!