A tax loss carryforward takes place where a business or individual reports losses on a tax return up to seven years after the loss occurred. Frequently the logic behind this is to reduce tax liability during a year where the income or profits are high if losses were experienced previously. The tax loss carryforward reduces the overall tax liability during the high-earning year by incorporating the earlier loss as a reduction to taxable income.

A tax loss carryforward is a legal means of rearranging earnings to the benefit of the taxpayer. A risk in a tax loss carryforward is that the high-earning year never comes in time to take advantage of the earlier loss.