Here is some information on the general tax framework of capital gains and losses for individuals.

In figuring your tax, you first need to determine whether you have a "net capital gain", "net capital loss", or neither, as those terms are defined in 26 USC § 1222.

A "net capital gain" is the amount by which your net long-term capital gains exceed your net short-term capital losses. If you have a "net capital gain", then the tax you would otherwise pay on your taxable income is reduced according to 26 USC § 1(h) and the provisions referenced therein (commonly referred to as the favourable rate for long-term capital gains and qualified dividends). Given a fixed taxable income,

**you would like to have as large as possible of a "net capital gain"** because then you will pay less taxes.

The next topic is deductions.

The rules for determining the deduction you can take in the

*current year* are found in 26 USC § 1211(b), which provides that you can take a deduction equal your capital gains plus the smaller of (i) $3000 (or $1500 for married filing separately), or (ii) the amount by which your capital losses exceed your capital gains. You will notice that

**for the purpose of this rule, there is no distinction between short-term or long-term holding periods**. This rule is commonly (and incorrectly) stated as limiting the capital loss deduction to $3000, but it's actually $3000 plus your capital gains. The deduction is capped at your total amount of capital losses.

For an individual, you have a "net capital loss" if your amount of otherwise-allowable capital losses exceeds the deduction that you can take for capital losses in the present year. If you have such a "net capital loss", then 26 USC § 1212(b) provides two formulas that calculate how much short-term and long-term loss you can carry forward to the next year.

The short-term capital loss carryforward is equal to the magnitude of the net short-term capital loss, minus the amount by which your capital loss deduction for the current year exceeded your capital gains, minus the net long-term capital gain.

The long-term capital loss carryforward is equal to the magnitude of the net long-term capital loss, minus the amount by which your capital loss deduction for the current year exceeded your capital gains, minus the net short-term capital gain.

Let's consider a hypothetical taxpayer who has the following capital gains and losses:

Short-term capital gain: $4000

Short-term capital loss: $500

Long-term capital gain: $5000

Long-term capital loss: $6000

This taxpayer:

**does not have** a "net capital gain", and**does not have** a "net capital loss", so there is nothing to carry forward to the next year, but**does have** a deduction of $6500 for capital losses in the current tax year.

If this was the taxpayer's only income, she would be taxed on $2500 at ordinary income rates. The $2500 is computed by adding up the gains ($4000+$5000) and then subtracting the $6500 deduction. There is no special rate applied because the taxpayer does not have a "net capital gain".

This is a very technical subject where it is very hard to state everything correctly without accidentally slipping up and making a mistake. I believe I stated everything correctly above, but that is not guaranteed.