A client took a 70,000 short-term loss on futures contracts back in 2012. That year, he used the $3,000 deduction against his ordinary income resulting in a sizable carryover.

The last 2 years, he’s shown a smaller capital gain. However, the company doing his tax preparation (H&R Block), has only allowed him to take a $3,000 offset against his ordinary income, and not his capital gains. He now has a substantial amount of stock this year that he would like to sell out. It would be long-term capital gains of at least the amount of carryover currently.

When I reviewed the IRS codes (Publication 550 I believe), it seems to indicate that the carryover can be used against capital gains in following years. Additionally, it appears that the carryover would need to go to short-term gains first, but could also go to the long-term gains after. Essentially, our client would like to use the long-term gains on the stock he wants to sell to eat up the large carryover he still has.

Might you be able to clear up my confusion on this?