What Is a Suspended Loss?

A suspended loss is a type of capital loss that is realized incrementally over more than one tax year. Losses of this type are normally realized over successive periods owing to the tax laws that relate to what is known as passive activity. The end result is that while the loss may have been sustained during one tax year, it may be used in whole or in part to offset gains in following years and help reduce the amount of taxes owed.

In most nations, a suspended loss will have to do with losses in income that are generated due to what is known as passive activity. This type of activity generates passive income from endeavors taken on by the taxpayer that do not require active engagement. This is contrasted with active income, which is generated by employment and other means that require ongoing effort on the part of the taxpayer. When that activity results in a loss rather than some sort of revenue, it may be necessary to carry over all or some of that loss to the next tax year, rather than realizing it in the current tax year.

One of the easiest ways to understand the impact of a suspended loss has an impact is to consider some activity that is intended to generate passive income, but instead generates a loss of $10,000 US dollars during a given tax year. Assuming that the passive income limitations do not allow the taxpayer to use that entire amount to offset taxes due on active income, that amount will be considered a suspended loss and carried over to the next year. Should those passive income activities generate revenue rather than a loss in the following tax year, the taxpayer can then claim all or a portion of that suspended loss, deducting that loss from the passive income generated, up to any limits imposed by current tax laws.

With suspended loss, the taxpayer is usually not able to utilize the loss in the tax year in which it was sustained, but can claim the loss in later years, provided that he or she does enjoy some sort of passive income stream during those later years. In most nations that recognize the idea of suspended loss, the loss cannot be deducted from any income that is considered active, such as income from a job that the taxpayer works full time. The loss can only be applied to an income that is considered passive, such as interest earned on investments.