- do the normal rules apply to PR taxes as a BFR-PR?
- will an existing rollover loss balance be retained when moving to PR?
- is it able to be used since I won’t have cap gains in the eyes of the IRS?
- what about the reverse situation, taking a capital loss balance out of PR to the mainland?
how does capital loss rollover normally work?
First off, let’s define how carryover losses normally work (separately from Act 60).
A taxpayer must compare short-term gains versus short-term losses, and long-term gains versus long-term losses, in determining the net short- and long-term gain or loss in any tax year.
LIMITATION OF CAPITAL LOSS
• An individual taxpayer may deduct up to a maximum of $3,000 of net capital losses against other ordinary income per year. Net short-term and net long-term capital losses may both be deducted in the same year, as long as the total deduction is $3,000 or less.
• All capital losses for a husband and wife filing jointly are computed as if they were the losses of one person.
• If a husband and wife file separate tax returns, the capital loss deduction is limited to $1,500 on each return in any tax year.
CAPITAL LOSS CARRYOVERS
• The IRS allows an individual or married taxpayer’s capital losses to be carried over for an unlimited number of years until the loss is exhausted.
• A capital loss that is carried over to a later tax year retains its long-term or short-term character for the year to which it is carried.
• A short-term capital loss carryover first offsets short-term capital gains incurred in the carryover year. If a net shortterm capital loss results, this loss next offsets net long-term capital gains incurred in the carryover year, and then ordinary income, up to the $3,000 maximum. Any additional short-term losses would be carried to the next tax year, and the comparison to short, long, and other ordinary income would begin again.
• A long-term capital loss carryover first reduces net long-term capital gains in the carryover year, then net short-term capital gains, and finally ordinary income, up to the $3,000 maximum.
how does it work with act 60?
taxable (read: not sold in a year when your decree is effective) PR-sourced losses can be rolled over and used to offset future taxable PR-sourced gains
US-sourced losses can be rolled over to offset US-source gains
see more discussion in this post about utilizing PR-sourced carryover losses