If the Trust generates a Capital Loss, the beneficiaries in most cases will not see a capital loss on their Schedule K-1 (Form 1041) Beneficiary’s Share of Income, Deductions, Credits, etc..

If the Trust generates a Capital Loss, it can not be passed through to the Trust's beneficiaries. It is retained within the trust itself and is designated as a Capital Loss Carryforward of the trust. This carryforward will be used to offset future year capital gains.

Per IRS Instructions for Form 1041 and Schedules A, B, G, J, and K-1 U.S. Income Tax Return for Estates and Trusts, on page 13:

Example. The John Doe Trust is a grantor type trust. During the year, the trust sold 100 shares of ABC stock for $1,010 in which it had a basis of $10 and 200 shares of XYZ stock for $10 in which it had a $1,020 basis.

The trust doesn't report these transactions on Form 1041. Instead, a schedule is attached to the Form 1041 showing each stock transaction separately and in the same detail as John Doe (grantor and owner) will need to report these transactions on his Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040). The trust doesn't net the capital gains and losses, nor does it issue John Doe a Schedule K-1 (Form 1041) showing a $10 long-term capital loss.

QSSTs. Income allocated to S corporation stock held by the trust is treated as owned by the income beneficiary of the portion of the trust that owns the stock. Report this income following the rules discussed above for grantor type trusts. A QSST can't elect any of the optional filing methods discussed below

However, the trust, and not the income beneficiary, is treated as the owner of the S corporation stock for figuring and attributing the tax results of a disposition of the stock. For example, if the disposition is a sale, the QSST election ends as to the stock sold and any gain or loss recognized on the sale will be that of the trust. For more information on QSSTs, see Regulations section 1.1361-1(j).

On page 43:

Box 11, Codes C and D—Unused Capital Loss Carryover

Upon termination of the trust or decedent's estate, the beneficiary succeeding to the property is allowed as a deduction any unused capital loss carryover under section 1212. If the estate or trust incurs capital losses in the final year, use the Capital Loss Carryover Worksheet in the Instructions for Schedule D (Form 1041) to figure the amount of capital loss carryover to be allocated to the beneficiary.

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