How long can Tax Losses be carried forward?
There is no time limit as to how long you can carry forward losses – whether income losses or capital losses, however they will be lost at death (a loss lost!). So, it makes sense that you should try to use up losses as early as possible. This is generally not too hard with income losses as these are easily eaten up the next financial year with more income being earned.
Using up capital losses tends to be more difficult though as a capital loss can only be used up by a capital gain – not general income.
Note that there are complex rules regarding companies and trusts in carrying forward losses.
Homer invested money in a business he ran which failed. He lost $200,000 and has a $200,000 capital loss which he has been carrying forward for 9 years now. Homer would love to use this loss up, but the trouble is he has no other asset he could sell to offset the loss.
If Homer owned shares for example he could sell shares with a $200,000 capital gain and not have to pay any tax.
But losing his money has meant that Homer doesn’t have any capital to invest with.
However, Homer’s daughter Lisa knows a thing or 2 so sets up a discretionary trust to hold investments. It could be possible that in future a gain from the trust could be distributed to Homer and his loss could offset this so that no tax is payable.
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