Capital losses can be used to offset which types of income?

Capital losses can indeed be used to offset both ordinary income and capital gains, which is why this answer is correct. When an individual incurs a capital loss, they can first use that loss to reduce any capital gains they have realized in the same tax year. If the capital losses exceed the capital gains, the taxpayer can then use up to $3,000 of the remaining losses to offset ordinary income, such as wages or salaries. Any unused losses can be carried forward to future tax years to offset income in those years, making this a key strategy for tax optimization.

The other options do not encompass the full scope of how capital losses can be applied. For example, stating that capital losses can only offset ordinary income limits their applicability and overlooks the benefit of using losses against capital gains first. Similarly, asserting that they can only offset capital gains ignores the additional tax relief available by applying excess losses against regular income. Lastly, claiming that capital losses are not deductible at all fails to acknowledge their significant role in tax strategy for investors.