Technical Information Release

Technical Information Release  TIR 87-10: Capital Loss Carryovers: Transition Rules

Date: 10/08/1987
Organization: Massachusetts Department of Revenue
Referenced Sources: Massachusetts General Laws

Personal Income Tax

In October 1986, the legislature amended the part of the Massachusetts personal income tax statute that covers capital loss carryover deductions, G.L. c. 62, § 2(c)(2). Chapter 488 of St. 1986 struck out the old provision, which allowed taxpayers to apply net capital losses up to $1,000 against taxable interest and dividends in the current tax year and to carry over any leftover net capital losses to offset net capital gains and up to $1,000 of taxable interest and dividends in each of the next five tax years. St. 1986, c. 488, § 27. In its place the legislature inserted a new provision that differentiates between long-term and short-term capital losses and gains and provides for offsetting net long-term capital gains with net short-term capital losses and net short-term capital gains with net long-term capital losses. The new provision also eliminates the five-year limit on carrying over excess capital loss deductions. New § 2(c)(2) allows taxpayers to carry over excess long-term and short term capital loss deductions from tax year to tax year, without limit, until a taxpayer has used the last of the capital loss deduction. The new provision is effective for tax years beginning on and after January 1, 1987.

This Technical Information Release (TIR) discusses how this new provision applies to capital loss carryover deductions that first arose under § 2(c)(2) before the 1986 amendment. It explains how the elimination of the five-year maximum on carryover losses applies to pre-existing losses. It also explains how a taxpayer offsets current net long-term and short-term capital gains with capital loss carryover deductions from previous years.

Under the new provision, long-term and short-term capital loss carryover deductions have a lifespan determined by their amount, not by their age. Chapter 488 of St. 1986 does not limit this provision to newly-created capital loss carryover deductions. As a result, if a taxpayer carries over a capital loss deduction from previous tax years into the tax year beginning on or after January 1, 1987, the taxpayer may continue to use that capital loss deduction in succeeding tax years until none is left to use as an offset. Carryover deductions that would have expired under the old provision in the tax year beginning on or after January 1, 1987 ( i.e., 1987 would have been their fifth carryover year) may now be used in succeeding tax years, until they are extinguished, just as a deduction from a loss first reported in the tax year beginning on or after January 1, 1987 may. The new provision, however, will not revive carryover losses that expired before the tax year beginning on or after January 1, 1987.

Under new § 2(c)(2), a taxpayer may offset long-term gains only with long-term losses (including any long-term carryover losses from previous years) and short-term gains only with short-term losses (including any short-term carryover losses from previous years). Before 1987 taxpayers did not classify capital gains as long-term or short-term in order to offset capital gains. Some taxpayers will have records to classify a pre-1987 carryover loss as long-term or short-term or divide it into a long-term portion and a short-term portion. A taxpayer who can so classify a pre-1987 carryover loss should do so, supporting the classification with the Schedules D from the applicable previous tax years. The taxpayer should then apply the newly-classified loss (or losses) to current gains as provided under new § 2(c)(2). Other taxpayers may not be able to determine whether a carryover loss from previous tax years is long-term or short-term. Such taxpayers must use their pre-1987 capital carryover losses first to offset current net long-term capital gains and then, if any of the carryover loss remains, to offset current net short-term capital gains.

/s/Stephen W. Kidder
Stephen W. Kidder
Commissioner of Revenue

October 8, 1987

TIR 87-10

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