As laid out by the IRS, this policy allows an investor to use current realized losses to offset future taxable capital gains. Different from a NOL Carry Forward, this type of tax benefit can only offset gains made on the sale of assets, thus reducing your tax liability on this account in future years.
To provide an example, imagine you sold a property held for investment for a loss of $10,000 in a given year. Assuming that your long-term gains for that year total $4,000, you are able to offset this amount with the loss you have just realized. Although you weren’t able to utilize all of your loss, the IRS still gives you credit, allowing the remaining $6,000 loss to be used to offset gains in subsequent years.