Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What happens to losses that remain after offsetting gains and also taking $3,000 against ordinary income?

1. They are added to next year's income

2. They are refunded by the IRS

3. They are carried forward to subsequent years

4. They are forfeited

The correct answer is: They are carried forward to subsequent years

When an investor experiences capital losses, they are first allowed to offset those losses against capital gains to reduce their taxable income. If any losses remain after this offsetting, investors can take an additional deduction of up to $3,000 against ordinary income, which reduces their overall taxable income further. If losses continue to exist after utilizing both the capital gains offset and the $3,000 deduction against ordinary income, those remaining losses are not lost; instead, they are carried forward to subsequent years. This means that the investor can use these unutilized losses in future tax years to offset gains or apply them to the $3,000 ordinary income deduction limit again. This carryforward provision allows taxpayers to continue to benefit from their losses until they can fully utilize them, ensuring that they are not forfeited or lost entirely. This understanding of capital loss treatment reflects the tax code's intention to provide relief to investors who may suffer losses in volatile markets, enabling them to alleviate some of the associated tax burdens over time.