Capital Gains and Losses
At the desk
| Forms | Form 8949 → Schedule D (Form 1120) → page 1, line 8. Form 4797 for §1231 property; net §1231 gain comes across to Schedule D as long-term |
| Rate | Net capital gain is ordinary income at 21%. No preferential rate for corporations |
| Net capital loss | Not deductible this year. Carry back 3 years, earliest year first, to the extent of that year’s net capital gain; then forward 5 years; then lost. Form 1139 or an amended return for the carryback |
| Character on carry | A carried capital loss, long- or short-term in origin, is treated as short-term in the year it lands |
| NOL interaction | A capital loss carryback cannot create or increase an NOL in the carryback year |
| Holding period | Long-term is more than 12 months. Acquisition date does not count; sale date does |
| §1231 | Net gain: long-term capital gain. Net loss: ordinary. Recapture first: §1245 in full, §1250 plus a §291 20% add-on for corporations |
| §1221 exclusions | Inventory; customer receivables; self-created copyrights, letters and similar property (patents and inventions since 2018); depreciable and real business property; supplies; hedges |
On this page
- What is a capital asset 2 notes
- Corporations versus individuals
- The netting process 3 notes · 2 examples
- §1231 property 4 notes
- Carryback and carryforward 4 notes · 1 example
- Study questions 15–19 5 notes
What is a capital asset
- §1221 does not define a capital asset. It defines everything that is not one: inventory held for sale; accounts and notes receivable from customers; a patent, invention, model or design, a secret formula or process, a copyright or a literary, musical or artistic composition, and letters and memoranda, in the hands of the person who created them or for whom they were produced; commodity derivatives and hedging transactions; U.S. government publications not bought at the public price; depreciable property and real property used in the business; and supplies regularly consumed in the business.
- Business property and real estate are not capital assets, but §1231 gives their net gain long-term capital gain treatment.
Corporations versus individuals
| Individual | C corporation | |
|---|---|---|
| Rate on long-term gain | 0%, 15% or 20% (plus 3.8% NIIT) | Same rate as everything else: 21% |
| Capital loss against ordinary income | Up to $3,000 a year ($1,500 married filing separately) | None |
| Unused capital loss | Forward indefinitely, keeping its character | Back 3 years, forward 5, becomes short-term, then expires |
The netting process
- Short-term gains and losses are combined into a net short-term gain (NSTG) or loss (NSTL); long-term into NLTG or NLTL. Carried-in losses from other years are short-term.
- Then the two are combined. Net capital gain results when NSTG and NLTG are both gains, when NSTG exceeds NLTL, or when NLTG exceeds NSTL. Net capital loss results in the mirror cases.
- Net capital gain goes to page 1 of Form 1120 as ordinary income. Net capital loss goes nowhere this year; it is carried back to the earliest of the three prior years with a net capital gain, then the next, then forward.
Short-term gain $1,000, long-term loss ($2,000), short-term loss ($3,000), long-term gain $5,000. Net short-term ($2,000); net long-term $3,000. Net capital gain $1,000, taxed at 21%.
Short-term gain $2,000, long-term loss ($7,000), short-term loss ($9,000), long-term gain $9,000. Net short-term ($7,000); net long-term $2,000. Net capital loss ($5,000) — carried back and forward, not deducted.
Land held 3 years, gain $100,000; machine held 5 years, loss ($20,000); Xanadu stock held 3 months, loss ($5,000); Diamond bonds held 15 months, loss ($8,000); Ruby stock held 11 months, gain $3,000.
Short-term: ($5,000) + $3,000 = NSTL ($2,000). §1231: $100,000 − $20,000 = net gain $80,000, treated as long-term; with the bonds, NLTG $72,000. Net capital gain $70,000.
§1231 property
- Real property and depreciable personal property used in the business and held more than one year, plus involuntary conversions of such property.
- Recapture comes first. §1245: gain on personal property is ordinary to the extent of all depreciation taken. §1250: gain on real property is ordinary to the extent depreciation exceeded straight-line (none for post-1986 property) — and for a corporation §291 adds 20% of the straight-line depreciation as ordinary income too. Recapture income is ordinary and cannot absorb capital losses.
- What is left after recapture goes into the §1231 pot. Net §1231 gain for the year is long-term capital gain; net §1231 loss is fully ordinary, and so is every §1231 gain and loss that went into it.
- added 2026 Five-year lookback (§1231(c)): net §1231 gain is recharacterized as ordinary to the extent of net §1231 losses deducted in the five prior years. Not in the course; matters when a corporation sells assets in consecutive years.
Carryback and carryforward
- Back to the third prior year first, then the second, then the first — to the extent each had a net capital gain. Then forward five years. Then lost.
- The carryback cannot create or increase an NOL in the year it goes to; that portion skips to the next year.
- A long-term loss that is carried becomes short-term in the year it is used.
- There is no election to forgo the carryback (unlike the old NOL rules). added 2026 Claim the carryback on Form 1139 within 12 months after the loss year, or on an amended return within the normal three-year period.
This year: net short-term gain $20,000, net long-term loss ($100,000) — net capital loss $80,000; other taxable income $200,000. Capital gains in prior years: four years ago $40,000, three years ago $5,000, two years ago $20,000, last year $0.
Four years ago is out of reach. Three years ago absorbs $5,000; two years ago absorbs $20,000; last year nothing. $55,000 carries forward for up to five years. The $200,000 of ordinary income is untouched.
Study questions 15–19
- SQ 15. Acer: taxable income $200,000 before: land used in business held 10 years, gain $25,000; machine held 2 years, loss ($13,000); investment stock held 3 years, loss ($4,000); investment stock held 9 months, loss ($3,000). Taxable income: $205,000 — net §1231 gain $12,000 is long-term; less the $4,000 long-term loss = NLTG $8,000; less NSTL $3,000 = net capital gain $5,000.
- SQ 16. Hargo: $100,000 from operations, a §1231 loss of $25,000, a net capital loss of $5,000. Taxable income: $75,000. The §1231 loss is ordinary; the capital loss waits.
- SQ 17. $50,000 net capital loss; prior-year gains: year 5 $6,000, year 4 $10,000, year 3 $5,000, year 2 $0, year 1 $15,000. Carryforward: $30,000 — only years 3, 2 and 1 are in the window and absorb $20,000.
- SQ 18. Table Toppers: net capital gain $25,000 this year, other income $150,000; prior years: year 5 $10,000, year 4 ($20,000), year 3 $3,000, years 2 and 1 $0. Taxable income: $168,000 — the year-4 loss absorbed $3,000 going back, then $10,000 in year 5, leaving $7,000 to offset this year’s gain: 150,000 + 18,000.
- SQ 19. Pleasant Surprises has a $50,000 capital loss and had capital losses in each of the three prior years. The loss is lost if not used against capital gains within five years.
Private reference, not client advice. Notes taken from a 2019 continuing-education course (Thomson Reuters Checkpoint Learning, C Corporations — Overview of Corporate Income Tax); figures and rules brought current to 2026 in October 2026 (P.L. 119-21, Rev. Proc. 2024-40, Rev. Proc. 2025-32). Verify current-year amounts before relying on them.