Understanding net capital gains and net capital losses can be challenging for taxpayers. The law provides that capital gains and losses are netted as outlined below:

1. Short-term capital losses (including any short-term loss carryover) are applied first to reduce short-term capital gains.

   a. The net short-term capital loss is then applied to reduce any net long-term capital gain from the 28% rate group.

   b. Any remainder after the reduction in (a) is used to reduce unrecaptured section 1250 gain (25% rate group), and 

   c. Finally, after the reductions in (a) and (b), the balance is used to reduce adjusted net capital gain 0%/15%/20% group.

Thus, a net short-term capital loss reduces adjusted net capital gain only to the extent it exceeds the sum of 28% rate gain and 25% rate gain.

2. Within each of the three long-term capital gain groups, gains and losses are netted to arrive at a net capital gain or a net capital loss      for the group.

3. A net loss from the 28% rate group (including long-term capital loss carryovers) is used first to reduce gain from the 25% rate group.      Any balance is then used to reduce net gain from the 0%/15%/20% rate group.

4. A net loss from the 0%/15%/20% rate group is used first to reduce gain from the 28% rate group. Any balance is then used to reduce      net gain from the 25% rate group.

There can only be a capital loss in the 28% and 0%/15%/20% rate groups since the 25% group only applies to gain on the recapture of depreciation.  If there were a loss on the sale of Sec 1250 property, the loss would be a Form 4797 ordinary loss that totally bypasses the Schedule D computation.