What can capital losses allow investors to do on their tax returns?

Capital losses play a significant role in tax returns by allowing investors to offset their capital gains. When an investor sells an asset at a loss, this loss can be used to reduce the amount of taxable capital gains. For instance, if an individual has $5,000 in capital gains from the sale of one investment and $3,000 in capital losses from the sale of another, they can offset their gains using the losses. This means that only $2,000 of the capital gains would be subject to taxation, effectively lowering their tax liability.

Furthermore, if the capital losses exceed the capital gains, individuals can use up to $3,000 of the excess loss to offset other forms of income, such as wages or salaries (or $1,500 if married filing separately). This ability to offset gains and, to some extent, other income is a strategic tax planning advantage for investors, allowing for a more favorable tax outcome based on their investment activities.

The other options do not accurately reflect how capital losses operate within the tax framework, as they do not allow for fixed deductions or eliminate taxes completely. They also do not specifically pertain to increasing tax deductions on real estate, which is a different tax scenario.