California Capital Loss Carryover Worksheet: Line-by-Line Example

The California Capital Loss Carryover Worksheet is an eight-line calculation tucked inside the instructions for Schedule D (540), and it tells you how much of this year’s unused capital loss rolls into next year’s return.¹ You need it any year your net capital loss exceeds the annual deduction limit: $3,000, or $1,500 if you’re married or a registered domestic partner filing separately.² Anything above that threshold carries forward indefinitely, used against future capital gains or chipped away $3,000 at a time against ordinary income.

Don’t assume you can copy your federal carryover onto the state return. California’s figure often differs, and the worksheet exists so you compute the state number correctly from state inputs.

What to Gather Before You Start

Pull these together first:

Your prior year’s California Schedule D (540 or 540NR), which carries the opening carryover balance into this year.
Your current year’s California Schedule D (540). You’ll pull the net loss figures from lines 8 and 11.
Your current year’s Form 540, specifically line 17 (California AGI) and line 18 (your standard or itemized deduction).³
Records for any basis differences between federal and California (depreciation schedules, S corporation stock records, documentation of state credits that reduced basis).

If you were a nonresident or part-year resident in any year that contributed to your carryover, you also need enough records to recalculate those years as if you had been a California resident throughout.

The Worksheet, Line by Line

The worksheet asks you to figure how much loss actually offset income this year, then subtract that from your total net loss. What’s left is next year’s carryover.¹

Line 1. Enter the loss from Schedule D (540), line 11, as a positive number. Line 11 is your net capital loss after the annual deduction cap, so this is the amount that reduced your taxable income.

Line 2. Enter the amount from Form 540, line 17 (California AGI).

Line 3. Enter the amount from Form 540, line 18 (your standard or itemized deduction).

Line 4. Subtract line 3 from line 2. If the result is negative, write it as a negative number. This is roughly your taxable income before the capital loss deduction.

Line 5. Add line 1 and line 4. If the result is less than zero, enter zero. This step caps the usable loss at the amount that actually absorbed positive income. If your income was already low enough that part of the $3,000 deduction had nothing to offset, line 5 pushes more loss into the carryover.

Line 6. Enter the loss from Schedule D (540), line 8, as a positive number. This is your total net capital loss before the annual cap cut it down.

Line 7. Enter the smaller of line 1 or line 5. This is the portion of the loss genuinely used this year.

Line 8. Subtract line 7 from line 6. The result is your California capital loss carryover to next year.

A Worked Example

Suppose your total net capital loss on Schedule D line 8 is $10,000, and after the $3,000 annual deduction, line 11 shows $3,000. Your California AGI is $55,000 and you take a standard deduction of $5,363.

Line 1: $3,000
Line 2: $55,000
Line 3: $5,363
Line 4: $49,637
Line 5: $52,637
Line 6: $10,000
Line 7: $3,000 (smaller of line 1 or line 5)
Line 8: $7,000

The $7,000 carries into next year. Here the full $3,000 deduction was absorbed because income was comfortably above zero. Line 5 only changes the result when income is low or line 4 is negative; then line 5 drops toward zero, line 7 shrinks, and the carryover grows because less of the loss was actually used.

Why Your California Carryover May Not Match the Federal One

Several California rules can push your state basis away from your federal basis and change the loss amount flowing into the worksheet:⁴

California has historically imposed different limits on accelerated depreciation and Section 179 expensing. Business property depreciated differently will produce a different gain or loss on sale.
California does not conform to the federal qualified small business stock exclusion under Section 1202. Gain you excluded federally is fully taxable here.
California does not conform to the federal Opportunity Zone deferral and exclusion rules. Gains you deferred federally remain taxable in California in the year realized.
California didn’t recognize S corporations before 1987, so your state basis in older S corporation stock may differ substantially from your federal basis.
Certain state credits tied to capital assets require you to reduce California basis by the credit amount, with no federal counterpart.

Any of these differences means running a separate California calculation rather than copying federal numbers over.

Residency Changes

If you were a California resident all year and in every prior year that generated your carryover, the standard worksheet handles everything. Two situations require more work.

If you’re now a California resident but were a nonresident during any year that contributed to your carryover, you must recalculate that carryover as if you had been a California resident for all prior years.⁴ This typically means reworking each year’s transactions using worldwide income and losses rather than only California-source amounts, and the recalculation often produces a larger carryover than what appeared on your prior nonresident returns.

If you’re a nonresident or ended the year as a nonresident, your carryover is based on California-source income and losses only, and you use Schedule D (540NR) instead of Schedule D (540).⁵ The 540NR worksheet uses two columns: Column A treats you as a California resident for the entire year using all income, and Column B treats you as a nonresident for the entire year using only California-source income. Which column drives your carryover depends on your residency status at year-end.

One boundary worth knowing: gains and losses from selling intangibles like stocks and bonds generally aren’t California-source for nonresidents, so a nonresident who sold stocks at a loss usually cannot build a California carryover from those sales. The exception is intangible property that has acquired a business situs in California, or trading activity so regular and systematic that it amounts to doing business in the state.

Where the Numbers Go on Your Return

The worksheet itself isn’t filed. Its results flow into two places. The current-year deduction (the smaller of your net loss or $3,000) appears on Schedule D (540) and feeds into Form 540. If your California capital gain or loss figure differs from the federal figure, you reconcile the difference on Schedule CA (540); for 2025 the adjustment is reported on line 7a.⁶ Schedule D (540) handles the mechanics: if the federal amount on line 10 is larger than the California amount on line 11, the difference goes on line 12a (and to Schedule CA line 7a, Column B); if smaller, it goes on line 12b (Column C).⁷

Line 8 of the worksheet is your opening carryover balance for next year. Write it down where you’ll find it twelve months from now.

How Long to Keep the Records

The Franchise Tax Board’s general statute of limitations is four years from the due date of the return or the date it was filed, whichever is later.⁸ That window is misleading for carryovers. The FTB advises keeping property records as long as they’re needed to figure the basis of the property, and a loss that takes a decade to use up requires records that survive the entire stretch.

Keep brokerage statements, purchase agreements, cost basis records, and documentation of any improvements or basis adjustments for every asset that contributed to the carryover. Keep each year’s Schedule D (540) and the completed worksheet so you can trace the loss from the year realized through every subsequent year’s deduction. If the FTB ever questions your carryover, you’ll need the chain from the original transaction forward. The limitations window extends to 12 years when the FTB characterizes a transaction as an abusive tax avoidance arrangement, and omissions of income exceeding 25 percent extend the standard period as well.⁸

1
State of California Franchise Tax Board. 2025 Instructions for California Schedule D (540)
2
Office of the Law Revision Counsel. 26 U.S.C. 1211 – Limitation on Capital Losses
3
State of California Franchise Tax Board. 2025 Instructions for Form 540
4
Franchise Tax Board. 2024 Instructions for California Schedule D (540)
5
Franchise Tax Board. 2022 Instructions for California Schedule D (540NR) – Purpose
6
State of California Franchise Tax Board. 2025 Instructions for Schedule CA (540)
7
California Franchise Tax Board. Schedule D (540) – California Capital Gain or Loss Adjustment
8
Franchise Tax Board. Keeping Your Tax Records