Loss Carryforward

DEFINITION of 'Loss Carryforward'

An accounting technique that applies the current year's net operating losses to future years' profits in order to reduce tax liability. Generally accepted accounting principles (GAAP) specify that loss carryforwards can be used in any one of the seven years following the loss.

BREAKING DOWN 'Loss Carryforward'

For example, if a company experienced a negative net operating income (NOI) in year one but positive NOI in one of the next two to seven years, the company could reduce its tax expense for one of those years by applying the loss experienced in the first year.

In the past, some equities have had large options redemptions that have caused share prices to plummet dramatically. Due to the increased amount of shares outstanding, investors who sell off their shares during that time will incur capital losses. Investors can carry forward these losses in order reduce tax liabilities on future capital gains.

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