How do capital loss carryforwards work in future tax years?

When your capital losses in a year exceed your capital gains plus the $3,000 ordinary-income deduction, the unused portion isn't lost – it carries forward indefinitely to future years until fully used. Each future year you first apply the carried-forward loss against any new capital gains, dollar for dollar, then deduct up to $3,000 against ordinary income, and carry any remainder forward again. The character is preserved: long-term losses carry as long-term, short-term as short-term. This is why a big harvested loss in a bad market can shelter gains for years to come – say you bank $40,000 of losses; you could offset $40,000 of future gains or chip away at $3,000 of income annually. Keep track on Schedule D and the Capital Loss Carryover Worksheet; tax software carries it automatically if you file consistently.