Imagine this scenario: you harvest a loss on an investment with the expectation of applying it to a large capital gain you triggered in the previous tax year.
In a nutshell: capital losses must first be used to offset capital gains realized in the current tax year. Only excess net capital losses can be used to offset gains achieved in other years. These net losses can be applied to net capital gains reported in any of the previous three years, or they can be carried forward indefinitely and applied to any future year.
One way this could really matter: when taking losses to offset a previous year’s gain, make sure to consider the gains you may already have realized in the current year – those will have to be covered first before you can apply the net capital loss to the previous year. This is especially important if you plan to offset a gain accrued three years’ previously since this would be your last opportunity to offset that old gain (you can move net losses backwards only up to three tax years).
For more information about capital losses, including ways to trigger a loss without selling an asset and how to avoid a superficial loss, see our article on Capital Losses and Tax Loss Selling.