A loss carryover, or loss carryforward, means that a taxpayer carries over a tax loss to future years to offset a profit. When the capital gain is smaller than the capital loss in a tax year, or the expenses are greater than the revenue in a tax year, the taxpayer suffers a loss (see 26 USC §1211 for more details of capital losses). Under §165 of the Internal Revenue Code (26 USC §165), losses can be allowed as a deduction with limitations. When a loss is greater than the amount allowed by the tax deduction, it can be carried to the following years. This creates a future tax relief, which essentially increased the income of a future year.
Different types of loss can be carried over for different number of years. For example, net operating loss can be carried forward for 20 years (to a year which has profit). Most states also have their own rules regulating the available period for carryover.
Only realized loss (26 USC §1001(b)) can be carried forward. This means even if a property loses its market value, if the taxpayer did not sell the property and realize the loss, the loss cannot be carried over.
[Last updated in July of 2020 by the Wex Definitions Team]