diff --git a/changelog.d/sch-d-cg-distributions-agi.fixed.md b/changelog.d/sch-d-cg-distributions-agi.fixed.md
new file mode 100644
index 00000000000..3d0811e886e
--- /dev/null
+++ b/changelog.d/sch-d-cg-distributions-agi.fixed.md
@@ -0,0 +1 @@
+Net capital gain distributions against Schedule D capital losses before the 26 U.S.C. 1211(b) $3,000 loss limit in adjusted gross income, net investment income, loss-limited capital gains (Michigan, Mississippi, Delaware and Georgia), a dependent's Social Security modified AGI and the capital gain tax worksheet test, and net spouses' gains and losses on a joint return.
diff --git a/policyengine_us/parameters/gov/irs/gross_income/sources.yaml b/policyengine_us/parameters/gov/irs/gross_income/sources.yaml
index 0d5ec44971a..af8391cacdf 100644
--- a/policyengine_us/parameters/gov/irs/gross_income/sources.yaml
+++ b/policyengine_us/parameters/gov/irs/gross_income/sources.yaml
@@ -9,8 +9,10 @@ values:
     - farm_rent_income
     - other_net_gain_gross_income
     - capital_gains
+    # Capital gain distributions reported on Form 1040 line 7a. With capital
+    # losses they go on Schedule D line 13; loss_ald nets the losses against
+    # them (capital_losses_allowed_against_gains).
     - non_sch_d_capital_gains
-    # Capital gain distributions received without filing Schedule D (Form 1040 line 7).
     - taxable_interest_income
     - rental_income
     # Royalties included in rental income
diff --git a/policyengine_us/parameters/gov/irs/investment/income/sources.yaml b/policyengine_us/parameters/gov/irs/investment/income/sources.yaml
index 3ec92696433..9b1f6303618 100644
--- a/policyengine_us/parameters/gov/irs/investment/income/sources.yaml
+++ b/policyengine_us/parameters/gov/irs/investment/income/sources.yaml
@@ -20,11 +20,11 @@ values:
     # code H input says otherwise, and a dependent's amounts stay out of the
     # filer's net investment income.
     - estate_net_investment_income
-    # Schedule D gain or loss of the head and spouse, limited under § 1211(b)
-    # (the Schedule D part of Form 8960 line 5a).
+    # Form 8960 line 5a: the head and spouse's Form 1040 line 7a capital gain
+    # or loss, Schedule D gains and losses with capital gain distributions
+    # (line 13), limited under § 1211(b). Distributions reported without
+    # Schedule D are the same amount.
     - filer_loss_limited_net_capital_gains
-    - non_sch_d_capital_gains
-    # Capital gain distributions received without filing Schedule D (Form 1040 line 7).
 metadata:
   unit: currency-USD
   label: net investment income sources
diff --git a/policyengine_us/tests/core/test_dependent_losses_agi_invariants.py b/policyengine_us/tests/core/test_dependent_losses_agi_invariants.py
index 4a8cf88db83..432e36b895f 100644
--- a/policyengine_us/tests/core/test_dependent_losses_agi_invariants.py
+++ b/policyengine_us/tests/core/test_dependent_losses_agi_invariants.py
@@ -20,9 +20,12 @@
 2. 0 <= limited_capital_loss <= the filing-status cap, and it never exceeds
    the non-dependents' own capital losses (26 USC 1211(b)).
 3. loss_ald >= limited_capital_loss >= 0.
-4. For tax units without dependents, both variables equal the pre-change
-   all-member formula (a reference implementation below), so filers without
-   dependents see no change.
+4. For tax units without dependents, both variables equal the all-member
+   formula (a reference implementation below), so leaving dependents out
+   changes nothing for filers without dependents. The capital part follows
+   26 USC 1211(b): losses are allowed up to the gains
+   (`capital_losses_allowed_against_gains`), plus the excess up to the cap
+   (`limited_capital_loss`).
 """
 
 import numpy as np
@@ -268,8 +271,8 @@ def test_loss_ald_at_least_limited_capital_loss(runs):
     )
 
 
-def test_units_without_dependents_match_pre_change_formula(runs, units):
-    """Differential check against the all-member formula used before."""
+def test_units_without_dependents_match_all_member_formula(runs, units):
+    """Differential check against the all-member formula."""
     p = runs["irs"]
     filing_status = runs["with"]["filing_status"]
     se = _by_person(units, "self_employment_income") + _by_person(
@@ -279,12 +282,13 @@ def test_units_without_dependents_match_pre_change_formula(runs, units):
     income = sum(_unit_sum(runs, np.maximum(x, 0)) for x in person_business)
     loss = sum(_unit_sum(runs, np.maximum(-x, 0)) for x in person_business)
     limited_business_loss = np.minimum(loss, income + p.ald.loss.max[filing_status])
-    capital_losses = _unit_sum(
-        runs,
-        np.maximum(0, -sum(_by_person(units, name) for name in CAPITAL_INPUTS)),
-    )
+    person_capital = sum(_by_person(units, name) for name in CAPITAL_INPUTS)
+    capital_losses = _unit_sum(runs, np.maximum(0, -person_capital))
+    capital_gains = _unit_sum(runs, np.maximum(0, person_capital))
+    allowed_against_gains = np.minimum(capital_losses, capital_gains)
     limited_capital_loss = np.minimum(
-        p.ald.loss.capital.max[filing_status], capital_losses
+        p.ald.loss.capital.max[filing_status],
+        capital_losses - allowed_against_gains,
     )
     no_dependents = np.array([not u["dependents"] for u in units])
     assert no_dependents.sum() > 100
@@ -295,6 +299,8 @@ def test_units_without_dependents_match_pre_change_formula(runs, units):
     )
     np.testing.assert_allclose(
         runs["with"]["loss_ald"][no_dependents],
-        (limited_business_loss + limited_capital_loss)[no_dependents],
+        (limited_business_loss + allowed_against_gains + limited_capital_loss)[
+            no_dependents
+        ],
         atol=TOLERANCE,
     )
diff --git a/policyengine_us/tests/core/test_dependent_net_investment_income_invariants.py b/policyengine_us/tests/core/test_dependent_net_investment_income_invariants.py
index 71deb84188a..f9c54139074 100644
--- a/policyengine_us/tests/core/test_dependent_net_investment_income_invariants.py
+++ b/policyengine_us/tests/core/test_dependent_net_investment_income_invariants.py
@@ -18,12 +18,14 @@
    AGI, NIIT MAGI or `net_investment_income_tax`.
 2. `net_investment_income` equals an independent numpy computation over the
    head and spouse: their interest, dividends, rents, passive pass-through,
-   estate and trust income and capital gain distributions, plus their netted
-   Schedule D gain or loss, limited under 26 USC 1211(b).
+   estate and trust income, plus their netted Schedule D gain or loss with
+   capital gain distributions on line 13, limited under 26 USC 1211(b).
 3. -loss limit <= `filer_loss_limited_net_capital_gains`, and it equals
    `loss_limited_net_capital_gains` when the unit has no dependents.
 4. For tax units without dependents, `net_investment_income` equals the
-   pre-change all-member formula, so filers without dependents see no change.
+   all-member formula (person-level sources plus
+   `loss_limited_net_capital_gains`), so leaving dependents out changes
+   nothing for filers without dependents.
 5. 0 <= NIIT = 3.8% x min(max(0, NII), max(0, MAGI - threshold)).
 """
 
@@ -56,7 +58,12 @@
     + NONNEGATIVE_INPUTS
     + ["partnership_s_corp_income", "passive_partnership_s_corp_income"]
 )
-CAPITAL_INPUTS = ["short_term_capital_gains", "long_term_capital_gains"]
+# Schedule D gains and losses, with capital gain distributions (line 13).
+CAPITAL_INPUTS = [
+    "short_term_capital_gains",
+    "long_term_capital_gains",
+    "non_sch_d_capital_gains",
+]
 # Every person-level amount Form 8960 counts, other than Schedule D gains.
 NII_PERSON_INPUTS = [
     "taxable_interest_income",
@@ -65,7 +72,6 @@
     "rental_income",
     "passive_partnership_s_corp_income",
     "estate_income",
-    "non_sch_d_capital_gains",
 ]
 OUTPUTS = [
     "net_investment_income",
@@ -305,8 +311,8 @@ def test_filer_capital_gains_within_loss_limit(runs, units):
     )
 
 
-def test_units_without_dependents_match_pre_change_formula(runs, units):
-    """Differential check against the all-member formula used before."""
+def test_units_without_dependents_match_all_member_formula(runs, units):
+    """Differential check against the all-member formula."""
     person_nii = sum(_by_person(units, name) for name in NII_PERSON_INPUTS)
     old = _unit_sum(runs, person_nii) + runs["with"]["loss_limited_net_capital_gains"]
     no_dependents = np.array([not u["dependents"] for u in units])
diff --git a/policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/adjusted_gross_income/schedule_d_capital_gain_distributions.yaml b/policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/adjusted_gross_income/schedule_d_capital_gain_distributions.yaml
new file mode 100644
index 00000000000..7110f79b8fa
--- /dev/null
+++ b/policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/adjusted_gross_income/schedule_d_capital_gain_distributions.yaml
@@ -0,0 +1,422 @@
+# Capital gain distributions with Schedule D gains and losses (2025).
+#
+# Instructions for Schedule D, "Capital Gain Distributions": "Enter on
+# Schedule D, line 13, the total capital gain distributions paid to you during
+# the year". Form 1040 instructions, line 7a, Exception 1: a filer skips
+# Schedule D only if "You have no capital losses, and your only capital gains
+# are capital gain distributions". 26 U.S.C. 1211(b) allows capital losses
+# "only to the extent of the gains from such sales or exchanges, plus (if such
+# losses exceed such gains) the lower of" $3,000 ($1,500 married filing
+# separately) or the excess.
+#
+# Schedule D: line 7 is the net short-term gain or loss, line 15 the net
+# long-term gain or loss including line 13, line 16 = lines 7 + 15, and line 21
+# is the smaller loss of line 16 or ($3,000). Form 1040 line 7a is line 16, or
+# line 21 if line 16 is a loss.
+
+- name: Distributions net against a long-term loss before the loss limit
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        long_term_capital_gains: -5_000
+        non_sch_d_capital_gains: 3_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Line 13 = 3,000; line 15 = -5,000 + 3,000 = -2,000; line 7 = 0;
+    # line 16 = -2,000; line 21 = -2,000 (smaller loss than -3,000).
+    loss_limited_net_capital_gains: -2_000
+    # 1211(b): 3,000 of the loss offsets the distributions, and the 2,000
+    # excess is below the 3,000 limit.
+    capital_losses_allowed_against_gains: 3_000
+    limited_capital_loss: 2_000
+    # Gross income 3,000 (the distributions) less 5,000 of allowed losses.
+    adjusted_gross_income: -2_000
+    # Form 8960 line 5a is Form 1040 line 7a.
+    net_investment_income: -2_000
+    # Lines 15 and 16 are losses and there are no qualified dividends.
+    has_qdiv_or_ltcg: false
+
+- name: Distributions above the loss leave a net gain
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        long_term_capital_gains: -5_000
+        non_sch_d_capital_gains: 6_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Line 15 = -5,000 + 6,000 = 1,000 = line 16, a gain on Form 1040 line 7a.
+    loss_limited_net_capital_gains: 1_000
+    capital_losses_allowed_against_gains: 5_000
+    limited_capital_loss: 0
+    adjusted_gross_income: 1_000
+    net_investment_income: 1_000
+    # Lines 15 and 16 are both gains.
+    has_qdiv_or_ltcg: true
+
+- name: A loss beyond the distributions is limited to 3,000
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        long_term_capital_gains: -10_000
+        non_sch_d_capital_gains: 4_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Line 16 = -10,000 + 4,000 = -6,000; line 21 = -3,000.
+    loss_limited_net_capital_gains: -3_000
+    capital_losses_allowed_against_gains: 4_000
+    limited_capital_loss: 3_000
+    adjusted_gross_income: -3_000
+
+- name: Distributions net against a short-term loss
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        short_term_capital_gains: -5_000
+        non_sch_d_capital_gains: 3_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Line 7 = -5,000; line 15 = 3,000; line 16 = -2,000; line 21 = -2,000.
+    loss_limited_net_capital_gains: -2_000
+    adjusted_gross_income: -2_000
+    # Line 15 is a gain but line 16 is a loss, so neither tax worksheet
+    # applies (Form 1040 instructions, line 16).
+    has_qdiv_or_ltcg: false
+
+- name: Married filing separately, the limit is 1,500
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        long_term_capital_gains: -5_000
+        non_sch_d_capital_gains: 1_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+        filing_status: SEPARATE
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Line 16 = -4,000; line 21 = -1,500.
+    loss_limited_net_capital_gains: -1_500
+    capital_losses_allowed_against_gains: 1_000
+    limited_capital_loss: 1_500
+    adjusted_gross_income: -1_500
+
+- name: Distributions without Schedule D are unchanged
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        non_sch_d_capital_gains: 3_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Exception 1: no capital losses and only capital gain distributions, so
+    # the 3,000 goes directly on Form 1040 line 7a.
+    loss_limited_net_capital_gains: 3_000
+    capital_losses_allowed_against_gains: 0
+    limited_capital_loss: 0
+    adjusted_gross_income: 3_000
+    net_investment_income: 3_000
+    # Form 1040 instructions, line 16: no Schedule D and distributions on
+    # line 7a.
+    has_qdiv_or_ltcg: true
+
+- name: A short-term gain alone does not use a capital gain tax worksheet
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        short_term_capital_gains: 5_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Line 15 = 0, so lines 15 and 16 are not both more than zero.
+    has_qdiv_or_ltcg: false
+    adjusted_gross_income: 5_000
+
+- name: Spouses' gains and losses net on one joint Schedule D
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        long_term_capital_gains: 10_000
+      person2:
+        age: 45
+        long_term_capital_gains: -5_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: TX
+  output:
+    filing_status: JOINT
+    # Line 15 = 10,000 - 5,000 = 5,000 = line 16. Before, gross income took
+    # person1's 10,000 and only 3,000 of person2's loss was deducted (7,000).
+    loss_limited_net_capital_gains: 5_000
+    capital_losses_allowed_against_gains: 5_000
+    limited_capital_loss: 0
+    adjusted_gross_income: 5_000
+
+- name: One spouse's distributions net against the other's short-term loss
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        non_sch_d_capital_gains: 2_000
+      person2:
+        age: 45
+        short_term_capital_gains: -6_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: TX
+  output:
+    # Line 7 = -6,000; line 15 = 2,000; line 16 = -4,000; line 21 = -3,000.
+    loss_limited_net_capital_gains: -3_000
+    capital_losses_allowed_against_gains: 2_000
+    limited_capital_loss: 3_000
+    adjusted_gross_income: -3_000
+
+- name: Wages with distributions and a long-term loss
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        employment_income: 50_000
+        long_term_capital_gains: -5_000
+        non_sch_d_capital_gains: 3_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Form 1040 line 9 = 50,000 + (-2,000) = 48,000 = line 11.
+    adjusted_gross_income: 48_000
+    # Line 15 = 48,000 - 15,750 standard deduction.
+    taxable_income: 32_250
+
+- name: A dependent's distributions net against their capital loss on their own return
+  period: 2022
+  input:
+    people:
+      head:
+        age: 45
+        is_tax_unit_head: true
+        employment_income: 50_000
+      parent:
+        age: 70
+        is_tax_unit_dependent: true
+        is_tax_unit_spouse: false
+        social_security_retirement: 20_000
+        taxable_interest_income: 18_000
+        long_term_capital_gains: -5_000
+        non_sch_d_capital_gains: 3_000
+    tax_units:
+      tax_unit:
+        members: [head, parent]
+    households:
+      household:
+        members: [head, parent]
+  output:
+    # The dependent's own Schedule D: line 16 = -5,000 + 3,000 = -2,000, so
+    # modified AGI (IRC 86(b)(2)) = 18,000 - 2,000 = 16,000. Before, the
+    # distributions were added on top of a 3,000 loss (18,000).
+    dependent_taxable_ss_magi: [0, 16_000]
+    # The head's return has none of the dependent's capital gains or losses.
+    capital_losses_allowed_against_gains: 0
+    limited_capital_loss: 0
+    adjusted_gross_income: 50_000
+
+- name: Each person's share includes the distributions
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        long_term_capital_gains: -5_000
+        non_sch_d_capital_gains: 3_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    loss_limited_net_capital_gains_person: -2_000
+
+- name: DC still isolates the self-employment loss when capital losses offset gains
+  absolute_error_margin: 0.01
+  period: 2024
+  input:
+    people:
+      person1:
+        age: 45
+        self_employment_income: -50_000
+        long_term_capital_gains: -5_000
+        non_sch_d_capital_gains: 3_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: DC
+  output:
+    # loss_ald = 50,000 self-employment + 3,000 capital loss against the
+    # distributions + 2,000 net capital loss.
+    loss_ald: 55_000
+    # Only the self-employment loss counts: max(0, 50,000 - 12,000).
+    dc_self_employment_loss_addition: 38_000
+
+- name: A dependent's capital loss does not change the head's worksheet test
+  period: 2025
+  input:
+    people:
+      head:
+        age: 45
+        is_tax_unit_head: true
+        employment_income: 300_000
+        non_sch_d_capital_gains: 5_000
+      child:
+        age: 20
+        is_tax_unit_dependent: true
+        is_tax_unit_spouse: false
+        long_term_capital_gains: -10_000
+    tax_units:
+      tax_unit:
+        members: [head, child]
+    households:
+      household:
+        members: [head, child]
+        state_code: TX
+  output:
+    # The head's own Form 1040 line 7a is the 5,000 of distributions (no
+    # Schedule D needed), so line 16 routes to the Qualified Dividends and
+    # Capital Gain Tax Worksheet. The dependent's loss is on the
+    # dependent's own return.
+    has_qdiv_or_ltcg: true
+    filer_loss_limited_net_capital_gains: 5_000
+    adjusted_gross_income: 305_000
+
+- name: A negative distributions input counts as zero
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        non_sch_d_capital_gains: -2_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Form 1099-DIV box 2a is not negative; gross income and Form 1040 line
+    # 7a both floor the input at zero.
+    adjusted_gross_income: 0
+    loss_limited_net_capital_gains: 0
+    filer_loss_limited_net_capital_gains: 0
+    loss_limited_net_capital_gains_person: 0
+    net_investment_income: 0
+    has_qdiv_or_ltcg: false
+
+
+- name: Netted distributions are taxed at ordinary rates
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      person1:
+        age: 45
+        employment_income: 100_000
+        long_term_capital_gains: -8_000
+        non_sch_d_capital_gains: 5_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # With PolicyEngine/policyengine-us#9781 (section 1(h)) on main, AGI and
+    # the rate schedule agree. Schedule D line 13 = 5,000; line 15 = -3,000
+    # = line 16; line 21 = -3,000.
+    adjusted_gross_income: 97_000
+    # 97,000 - 15,750.
+    taxable_income: 81_250
+    # Lines 15 and 16 are losses: no net capital gain (26 U.S.C. 1222(11)),
+    # so the distributions get no preferential rate.
+    net_capital_gain: 0
+    capital_gains_tax: 0
+    # 2025 single brackets: 1,192.50 + 12% x 36,550 + 22% x (81,250 - 48,475)
+    # = 1,192.50 + 4,386 + 7,210.50.
+    income_tax_main_rates: 12_789
diff --git a/policyengine_us/tests/policy/baseline/gov/states/md/tax/income/capital_gains/md_capital_gains_surtax.yaml b/policyengine_us/tests/policy/baseline/gov/states/md/tax/income/capital_gains/md_capital_gains_surtax.yaml
index a42e7f34eb7..1e12d9fed73 100644
--- a/policyengine_us/tests/policy/baseline/gov/states/md/tax/income/capital_gains/md_capital_gains_surtax.yaml
+++ b/policyengine_us/tests/policy/baseline/gov/states/md/tax/income/capital_gains/md_capital_gains_surtax.yaml
@@ -149,8 +149,8 @@
     people:
       person1:
         long_term_capital_gains: 120_000
-        short_term_capital_gains: 30_000
-        capital_losses: 50_000
+        # $30,000 of short-term gains less $50,000 of short-term losses.
+        short_term_capital_gains: -20_000
     tax_units:
       tax_unit:
         members: [person1]
@@ -160,11 +160,43 @@
         members: [person1]
         state_code: MD
   output:
-    # Gross gains: $120,000 + $30,000 = $150,000
-    # Capital losses limited to $3,000 federal cap (was $50,000)
-    # Net gains after losses: max($150,000 - $3,000, 0) = $147,000
-    # Surtax: $147,000 * 2% = $2,940
-    md_capital_gains_surtax: 2_940
+    # Federal Schedule D line 16 = $120,000 - $20,000 = $100,000. Losses up
+    # to the gains are allowed in full (26 U.S.C. 1211(b)); the $3,000 cap
+    # applies only to losses in excess of gains.
+    # 2025 Form 502CG line 1 (Form 502 line 1c, federal line 7a): $100,000
+    # Surtax: $100,000 * 2% = $2,000
+    md_capital_gains_surtax: 2_000
+
+- name: MD Capital gains surtax 2025 - One spouse's loss within the other's gains
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    people:
+      person1:
+        age: 50
+        long_term_capital_gains: 100_000
+      person2:
+        age: 48
+        short_term_capital_gains: -20_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        adjusted_gross_income: 450_000
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: MD
+  output:
+    # Joint federal Schedule D line 16 = $100,000 - $20,000 = $80,000. The
+    # loss is within the gains, so 26 U.S.C. 1211(b) allows it in full and
+    # no $3,000 capped loss is left to subtract again.
+    # 2025 Form 502CG line 1 (federal line 7a): $80,000
+    # Surtax: $80,000 * 2% = $1,600 (subtracting a $3,000 capped loss again
+    # gave $1,540)
+    md_capital_gains_surtax: 1_600
 
 - name: MD Capital gains surtax 2025 - High earner with large gains
   period: 2025
diff --git a/policyengine_us/tests/policy/baseline/gov/states/mi/tax/income/mi_household_resources.yaml b/policyengine_us/tests/policy/baseline/gov/states/mi/tax/income/mi_household_resources.yaml
index f04cbe65ec2..629963b3f8d 100644
--- a/policyengine_us/tests/policy/baseline/gov/states/mi/tax/income/mi_household_resources.yaml
+++ b/policyengine_us/tests/policy/baseline/gov/states/mi/tax/income/mi_household_resources.yaml
@@ -87,9 +87,10 @@
   output:
     # Per MI-1040CR-7 Line 24: losses cannot exceed $3,000 for MFJ
     # loss_limited_net_capital_gains: max(-150,000, -3,000) = -3,000
-    # above_the_line_deductions includes loss_ald of 3,000
-    # Total: 50,000 + (-3,000) - 3,000 = 44,000
-    mi_household_resources: 44_000
+    # The capital loss is not a U.S. Schedule 1 adjustment (MI-1040CR line
+    # 30), so it is not subtracted a second time.
+    # Total: 50,000 + (-3,000) = 47,000
+    mi_household_resources: 47_000
 
 - name: Capital gains loss limited to 1500 for MFS
   period: 2024
@@ -101,6 +102,53 @@
   output:
     # Per MI-1040CR-7 Line 24: losses cannot exceed $1,500 for MFS
     # loss_limited_net_capital_gains: max(-100,000, -1,500) = -1,500
-    # above_the_line_deductions includes loss_ald of 1,500
-    # Total: 50,000 + (-1,500) - 1,500 = 47,000
-    mi_household_resources: 47_000
+    # Not subtracted again as a Schedule 1 adjustment (line 30).
+    # Total: 50,000 + (-1,500) = 48,500
+    mi_household_resources: 48_500
+
+- name: Capital gain distributions net against a capital loss
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        employment_income_before_lsr: 50_000
+        long_term_capital_gains: -20_000
+        non_sch_d_capital_gains: 20_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: MI
+  output:
+    # 2025 MI-1040 book, MI-1040CR line 19: "net capital gains and losses ...
+    # from your U.S. Schedule D". Schedule D line 16 = -20,000 + 20,000
+    # (line 13) = 0. Line 30 (U.S. Schedule 1 adjustments) has none.
+    mi_household_resources: 50_000
+
+- name: Spouses' capital gains and losses net on a joint Schedule D
+  period: 2025
+  input:
+    people:
+      person1:
+        age: 45
+        employment_income_before_lsr: 50_000
+        long_term_capital_gains: 40_000
+      person2:
+        age: 45
+        long_term_capital_gains: -40_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    marital_units:
+      marital_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: MI
+  output:
+    # Line 19: Schedule D line 16 = 40,000 - 40,000 = 0.
+    mi_household_resources: 50_000
diff --git a/policyengine_us/tests/test_capital_gain_distributions_loss_limit.py b/policyengine_us/tests/test_capital_gain_distributions_loss_limit.py
new file mode 100644
index 00000000000..398df7e19db
--- /dev/null
+++ b/policyengine_us/tests/test_capital_gain_distributions_loss_limit.py
@@ -0,0 +1,413 @@
+"""Property tests: capital gain distributions net inside the capital loss limit.
+
+A filer with capital losses or other capital gains files Schedule D and enters
+capital gain distributions on line 13 (2025 Instructions for Schedule D,
+"Capital Gain Distributions"). Line 16 combines the short-term and long-term
+totals, and if it is a loss, line 21 limits it to $3,000 ($1,500 married
+filing separately), as 26 U.S.C. 1211(b) does. Form 1040 line 7a is line 16,
+or line 21. A filer whose only capital gains are distributions skips
+Schedule D and reports them on line 7a directly (Form 1040 instructions, line
+7a, Exception 1); the amount is the same.
+
+So for every combination of long-term (LT) and short-term (ST) gains and
+losses and distributions (D) of the filers on a return:
+
+1. The capital gain or loss in adjusted gross income, and
+   loss_limited_net_capital_gains, equal max(-limit, LT + ST + D).
+2. capital_losses_allowed_against_gains and limited_capital_loss split the
+   1211(b) allowance: the losses allowed up to the gains, and the net loss,
+   which is between 0 and the limit.
+3. Net investment income (Form 8960 line 5a) is the same Form 1040 line 7a
+   amount.
+4. has_qdiv_or_ltcg is true exactly when Schedule D lines 15 (LT + D) and 16
+   (LT + D + ST) are both more than zero.
+5. The people's shares in loss_limited_net_capital_gains_person add up to the
+   tax unit amount (to within single-precision rounding of the proportional
+   split of a net loss).
+6. Without Schedule D gains or losses the results are the distributions, as
+   before the change.
+7. A dependent's modified AGI for Social Security (IRC 86(b)(2)), figured on
+   the dependent's own return, nets the same way.
+
+Amounts are whole dollars of at most $2,000,000, so every sum is exact in
+single precision and the comparisons are exact, apart from the person shares
+in 5.
+"""
+
+import itertools
+
+import numpy as np
+import pytest
+
+from policyengine_core.periods import instant
+from policyengine_core.reforms import Reform
+
+from policyengine_us import Simulation
+
+YEAR = 2025
+LIMIT = {"SINGLE": 3_000, "JOINT": 3_000, "SEPARATE": 1_500}
+
+OUTPUTS = [
+    "adjusted_gross_income",
+    "loss_limited_net_capital_gains",
+    "capital_losses_allowed_against_gains",
+    "limited_capital_loss",
+    "net_investment_income",
+    "has_qdiv_or_ltcg",
+]
+
+
+def line_7a(h):
+    """Form 1040 line 7a from the return's totals."""
+    total = sum(
+        p["long_term"] + p["short_term"] + p["distributions"] for p in h["people"]
+    )
+    return max(-LIMIT[h["filing_status"]], total)
+
+
+def schedule_d_lines_15_16(h):
+    line_15 = sum(p["long_term"] + p["distributions"] for p in h["people"])
+    line_16 = line_15 + sum(p["short_term"] for p in h["people"])
+    return line_15, line_16
+
+
+def build_situation(households):
+    """One tax unit per household, with only capital gains, losses and
+    distributions, so adjusted gross income is the capital gain or loss."""
+    people, tax_units, marital_units, households_out = {}, {}, {}, {}
+    for i, h in enumerate(households):
+        members = []
+        for j, p in enumerate(h["people"]):
+            name = f"person_{i}_{j}"
+            people[name] = {
+                "age": {YEAR: 45},
+                "long_term_capital_gains": {YEAR: p["long_term"]},
+                "short_term_capital_gains": {YEAR: p["short_term"]},
+                "non_sch_d_capital_gains": {YEAR: p["distributions"]},
+            }
+            members.append(name)
+        # Set on every unit: a variable input for some units gives the
+        # others its default value, not its formula.
+        tax_units[f"tax_unit_{i}"] = {
+            "members": members,
+            "filing_status": {YEAR: h["filing_status"]},
+        }
+        marital_units[f"marital_unit_{i}"] = {"members": members}
+        households_out[f"household_{i}"] = {
+            "members": members,
+            "state_code": {YEAR: "TX"},
+        }
+    return {
+        "people": people,
+        "tax_units": tax_units,
+        "marital_units": marital_units,
+        "households": households_out,
+    }
+
+
+def calculate(households):
+    simulation = Simulation(situation=build_situation(households))
+    results = {v: np.asarray(simulation.calculate(v, YEAR)) for v in OUTPUTS}
+    results["filing_status"] = np.asarray(
+        simulation.calculate("filing_status", YEAR).decode_to_str()
+    )
+    results["person_share"] = np.asarray(
+        simulation.calculate("loss_limited_net_capital_gains_person", YEAR)
+    )
+    return results
+
+
+def assert_properties(households):
+    model = calculate(households)
+    person = 0
+    for i, h in enumerate(households):
+        fs = h["filing_status"]
+        assert model["filing_status"][i] == fs, h
+        limit = LIMIT[fs]
+        expected = line_7a(h)
+        # 1. AGI and Form 1040 line 7a.
+        assert model["adjusted_gross_income"][i] == expected, h
+        assert model["loss_limited_net_capital_gains"][i] == expected, h
+        # 2. The 1211(b) split, and the identity it gives: gross income
+        # includes the gains, and the two parts deduct the losses.
+        allowed_against_gains = model["capital_losses_allowed_against_gains"][i]
+        net_loss = model["limited_capital_loss"][i]
+        assert 0 <= net_loss <= limit, h
+        assert net_loss == max(0, -expected), h
+        gains = sum(
+            max(0, p["long_term"] + p["short_term"]) + p["distributions"]
+            for p in h["people"]
+        )
+        losses = sum(max(0, -(p["long_term"] + p["short_term"])) for p in h["people"])
+        assert allowed_against_gains == min(losses, gains), h
+        assert allowed_against_gains + net_loss == min(losses, gains + limit), h
+        assert gains - allowed_against_gains - net_loss == expected, h
+        # 3. Form 8960 line 5a.
+        assert model["net_investment_income"][i] == expected, h
+        # 4. Form 1040 line 16 routing (no qualified dividends here).
+        line_15, line_16 = schedule_d_lines_15_16(h)
+        assert bool(model["has_qdiv_or_ltcg"][i]) == (line_15 > 0 and line_16 > 0), h
+        # 5. Person shares. A net loss is allocated in proportion to each
+        # person's amount, a division that single precision rounds (for
+        # example -3,000 split as 12/17 and 5/17 sums to -3,000.0002).
+        n = len(h["people"])
+        shares = model["person_share"][person : person + n].astype(float)
+        assert abs(shares.sum() - expected) <= 0.01, h
+        person += n
+        # 6. The path without Schedule D.
+        if all(p["long_term"] == 0 and p["short_term"] == 0 for p in h["people"]):
+            distributions = sum(p["distributions"] for p in h["people"])
+            assert expected == distributions
+            assert allowed_against_gains == 0 and net_loss == 0, h
+
+
+# ---------------------------------------------------------------------------
+# A deterministic grid (runs without Hypothesis).
+# ---------------------------------------------------------------------------
+
+GRID_AMOUNTS = [-12_000, -5_000, -2_500, 0, 1_000, 4_000]
+GRID_DISTRIBUTIONS = [0, 1_000, 3_000, 9_000]
+
+
+def grid_households():
+    households = []
+    for lt, st_, d in itertools.product(GRID_AMOUNTS, GRID_AMOUNTS, GRID_DISTRIBUTIONS):
+        person = {"long_term": lt, "short_term": st_, "distributions": d}
+        households.append({"filing_status": "SINGLE", "people": [person]})
+        households.append({"filing_status": "SEPARATE", "people": [person]})
+        # The same totals split between spouses: the long-term amount and the
+        # distributions with one spouse, the short-term amount with the other.
+        households.append(
+            {
+                "filing_status": "JOINT",
+                "people": [
+                    {"long_term": lt, "short_term": 0, "distributions": d},
+                    {"long_term": 0, "short_term": st_, "distributions": 0},
+                ],
+            }
+        )
+    return households
+
+
+def test_grid():
+    assert_properties(grid_households())
+
+
+def test_example_from_the_schedule_d_instructions():
+    """Long-term loss 5,000 and distributions 3,000: line 16 is -2,000, so
+    the deductible loss is 2,000 (not 3,000 against gross income that still
+    includes the distributions, which gave 0)."""
+    h = {
+        "filing_status": "SINGLE",
+        "people": [{"long_term": -5_000, "short_term": 0, "distributions": 3_000}],
+    }
+    model = calculate([h])
+    assert model["adjusted_gross_income"][0] == -2_000
+    assert model["limited_capital_loss"][0] == 2_000
+
+
+# ---------------------------------------------------------------------------
+# Reforms that drop a source from gross income.
+# ---------------------------------------------------------------------------
+
+
+def without_gross_income_source(name):
+    """A reform that removes one source from gov.irs.gross_income.sources."""
+
+    class reform(Reform):
+        def apply(self):
+            def modify(parameters):
+                sources = parameters.gov.irs.gross_income.sources
+                values = [s for s in sources(f"{YEAR}-01-01") if s != name]
+                sources.update(
+                    start=instant(f"{YEAR}-01-01"),
+                    stop=instant(f"{YEAR}-12-31"),
+                    value=values,
+                )
+                return parameters
+
+            self.modify_parameters(modify)
+
+    return reform
+
+
+@pytest.mark.parametrize(
+    "dropped, agi, allowed_against_gains, net_loss, dependent_magi",
+    [
+        # Baseline: Schedule D line 16 = -5,000 + 3,000 = -2,000.
+        (None, -2_000, 3_000, 2_000, -2_000),
+        # Distributions out of gross income: nothing to net the loss against,
+        # so the full 3,000 limit applies, on the dependent's return too.
+        ("non_sch_d_capital_gains", -3_000, 0, 3_000, -3_000),
+        # Capital gains out of gross income: capital losses from sales are
+        # not deductible either, on the head's return or the dependent's;
+        # the distributions stay in gross income.
+        ("capital_gains", 3_000, 0, 0, 3_000),
+    ],
+)
+def test_netting_follows_the_gross_income_sources(
+    dropped, agi, allowed_against_gains, net_loss, dependent_magi
+):
+    people = {
+        "head": {
+            "age": {YEAR: 45},
+            "is_tax_unit_head": {YEAR: True},
+            "long_term_capital_gains": {YEAR: -5_000},
+            "non_sch_d_capital_gains": {YEAR: 3_000},
+        },
+        "dependent": {
+            "age": {YEAR: 70},
+            "is_tax_unit_dependent": {YEAR: True},
+            "is_tax_unit_spouse": {YEAR: False},
+            "long_term_capital_gains": {YEAR: -5_000},
+            "non_sch_d_capital_gains": {YEAR: 3_000},
+        },
+    }
+    members = list(people)
+    simulation = Simulation(
+        situation={
+            "people": people,
+            "tax_units": {"tax_unit": {"members": members}},
+            "households": {
+                "household": {"members": members, "state_code": {YEAR: "TX"}}
+            },
+        },
+        reform=without_gross_income_source(dropped) if dropped else None,
+    )
+    assert simulation.calculate("adjusted_gross_income", YEAR)[0] == agi
+    assert (
+        simulation.calculate("capital_losses_allowed_against_gains", YEAR)[0]
+        == allowed_against_gains
+    )
+    assert simulation.calculate("limited_capital_loss", YEAR)[0] == net_loss
+    assert simulation.calculate("dependent_taxable_ss_magi", YEAR)[1] == dependent_magi
+
+
+def test_the_two_loss_limit_parameters_agree():
+    """limited_capital_loss and dependent_taxable_ss_magi read
+    gov.irs.ald.loss.capital.max; loss_limited_net_capital_gains and
+    filer_loss_limited_net_capital_gains read gov.irs.capital_gains.loss_limit.
+    AGI's capital amount equals Form 1040 line 7a only while they agree."""
+    from policyengine_us import CountryTaxBenefitSystem
+
+    parameters = CountryTaxBenefitSystem().parameters
+    for year in range(2013, 2036):
+        irs = parameters(f"{year}-01-01").gov.irs
+        for status in [
+            "SINGLE",
+            "JOINT",
+            "SEPARATE",
+            "HEAD_OF_HOUSEHOLD",
+            "SURVIVING_SPOUSE",
+        ]:
+            assert (
+                irs.ald.loss.capital.max[status] == irs.capital_gains.loss_limit[status]
+            ), (year, status)
+
+
+# ---------------------------------------------------------------------------
+# Hypothesis.
+# ---------------------------------------------------------------------------
+
+# Hypothesis is a dev extra; skip rather than fail collection without it.
+hypothesis = pytest.importorskip("hypothesis")
+st = pytest.importorskip("hypothesis.strategies")
+
+AMOUNT = st.integers(min_value=-2_000_000, max_value=2_000_000)
+SMALL = st.integers(min_value=-20_000, max_value=20_000)
+DISTRIBUTIONS = st.one_of(
+    st.just(0),
+    st.integers(min_value=0, max_value=20_000),
+    st.integers(min_value=0, max_value=2_000_000),
+)
+
+
+@st.composite
+def person(draw):
+    amounts = draw(st.sampled_from([AMOUNT, SMALL]))
+    return {
+        "long_term": draw(st.one_of(st.just(0), amounts)),
+        "short_term": draw(st.one_of(st.just(0), amounts)),
+        "distributions": draw(DISTRIBUTIONS),
+    }
+
+
+@st.composite
+def household(draw):
+    filing_status = draw(st.sampled_from(["SINGLE", "SEPARATE", "JOINT"]))
+    n = 2 if filing_status == "JOINT" else 1
+    return {
+        "filing_status": filing_status,
+        "people": [draw(person()) for _ in range(n)],
+    }
+
+
+@hypothesis.settings(max_examples=60, deadline=None)
+@hypothesis.given(st.lists(household(), min_size=1, max_size=12))
+def test_properties(households):
+    assert_properties(households)
+
+
+@hypothesis.settings(max_examples=40, deadline=None)
+@hypothesis.given(
+    st.lists(household(), min_size=1, max_size=8),
+    st.integers(min_value=1, max_value=50_000),
+)
+def test_more_distributions_never_lower_agi(households, extra):
+    """Adjusted gross income does not fall when distributions rise."""
+    more = [
+        {
+            "filing_status": h["filing_status"],
+            "people": [
+                {
+                    **h["people"][0],
+                    "distributions": h["people"][0]["distributions"] + extra,
+                }
+            ]
+            + h["people"][1:],
+        }
+        for h in households
+    ]
+    base = calculate(households)["adjusted_gross_income"]
+    raised = calculate(more)["adjusted_gross_income"]
+    assert (raised >= base).all()
+    # And by no more than the extra distributions.
+    assert (raised - base <= extra).all()
+
+
+@hypothesis.settings(max_examples=40, deadline=None)
+@hypothesis.given(st.lists(person(), min_size=1, max_size=10))
+def test_dependent_modified_agi(dependents):
+    """A dependent's own-return modified AGI (IRC 86(b)(2)) nets the
+    distributions inside the single-filer limit."""
+    people, tax_units, households_out = {}, {}, {}
+    for i, p in enumerate(dependents):
+        head, dep = f"head_{i}", f"dependent_{i}"
+        people[head] = {"age": {YEAR: 45}, "is_tax_unit_head": {YEAR: True}}
+        people[dep] = {
+            "age": {YEAR: 70},
+            "is_tax_unit_dependent": {YEAR: True},
+            "is_tax_unit_spouse": {YEAR: False},
+            "long_term_capital_gains": {YEAR: p["long_term"]},
+            "short_term_capital_gains": {YEAR: p["short_term"]},
+            "non_sch_d_capital_gains": {YEAR: p["distributions"]},
+        }
+        tax_units[f"tax_unit_{i}"] = {"members": [head, dep]}
+        households_out[f"household_{i}"] = {
+            "members": [head, dep],
+            "state_code": {YEAR: "TX"},
+        }
+    simulation = Simulation(
+        situation={
+            "people": people,
+            "tax_units": tax_units,
+            "households": households_out,
+        }
+    )
+    magi = np.asarray(simulation.calculate("dependent_taxable_ss_magi", YEAR))
+    agi = np.asarray(simulation.calculate("adjusted_gross_income", YEAR))
+    for i, p in enumerate(dependents):
+        total = p["long_term"] + p["short_term"] + p["distributions"]
+        assert magi[2 * i + 1] == max(-3_000, total), p
+        # The dependent's capital gains and losses stay off the head's return.
+        assert agi[i] == 0, p
diff --git a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/capital_losses_allowed_against_gains.py b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/capital_losses_allowed_against_gains.py
new file mode 100644
index 00000000000..745a37c4552
--- /dev/null
+++ b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/capital_losses_allowed_against_gains.py
@@ -0,0 +1,60 @@
+from policyengine_us.model_api import *
+
+
+class capital_losses_allowed_against_gains(Variable):
+    value_type = float
+    entity = TaxUnit
+    label = "Capital losses allowed against capital gains"
+    unit = USD
+    documentation = (
+        "Capital losses deducted to the extent of capital gains, the first "
+        "part of the allowance in 26 U.S.C. 1211(b). Gross income includes "
+        "each filer's net capital gain and capital gain distributions, but "
+        "not losses; this deduction nets the losses against those gains, as "
+        "Schedule D does with capital gain distributions on line 13. "
+        "limited_capital_loss is the second part, the net loss up to the "
+        "$3,000 limit."
+    )
+    definition_period = YEAR
+    reference = (
+        dict(
+            title="26 U.S. Code § 1211(b) - Limitation on capital losses",
+            href="https://www.law.cornell.edu/uscode/text/26/1211#b",
+        ),
+        dict(
+            title="26 U.S. Code § 62(a)(3) - Losses from sale or exchange of property",
+            href="https://www.law.cornell.edu/uscode/text/26/62#a_3",
+        ),
+        dict(
+            title="26 U.S. Code § 852(b)(3)(B) - Capital gain dividends",
+            href="https://www.law.cornell.edu/uscode/text/26/852#b_3_B",
+        ),
+        dict(
+            title="2025 Instructions for Schedule D (Form 1040), Capital Gain Distributions",
+            href="https://www.irs.gov/pub/irs-prior/i1040sd--2025.pdf#page=2",
+        ),
+    )
+
+    def formula(tax_unit, period, parameters):
+        sources = parameters(period).gov.irs.gross_income.sources
+        person = tax_unit.members
+        # A tax-unit dependent's capital gains and losses belong on the
+        # dependent's own return, as in irs_gross_income.
+        not_dependent = ~person("is_tax_unit_dependent", period)
+        # The capital gains irs_gross_income counts: each filer's net gain
+        # from sales and exchanges, and capital gain distributions reported
+        # without Schedule D. Capital gain distributions are long-term capital
+        # gains (26 U.S.C. 852(b)(3)(B)), and a filer with capital losses
+        # enters them on Schedule D line 13, where they net against the
+        # losses.
+        gains = 0
+        for source in ["capital_gains", "non_sch_d_capital_gains"]:
+            if source in sources:
+                gains += max_(0, person(source, period))
+        gains_in_gross_income = tax_unit.sum(not_dependent * gains)
+        # Losses from sales and exchanges are deductible while their gains
+        # are in gross income (a reform can drop capital_gains from it).
+        if "capital_gains" not in sources:
+            return 0 * gains_in_gross_income
+        capital_losses = tax_unit_non_dep_sum("capital_losses", tax_unit, period)
+        return min_(capital_losses, gains_in_gross_income)
diff --git a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/limited_capital_loss.py b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/limited_capital_loss.py
index 0206b428c2f..2009c72a419 100644
--- a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/limited_capital_loss.py
+++ b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/limited_capital_loss.py
@@ -6,15 +6,38 @@ class limited_capital_loss(Variable):
     entity = TaxUnit
     label = "Limited capital loss deduction"
     unit = USD
-    documentation = "The capital loss deductible from gross income."
+    documentation = (
+        "The net capital loss deductible from gross income: the excess of "
+        "capital losses over capital gains, including capital gain "
+        "distributions, up to $3,000 ($1,500 if married filing separately). "
+        "Schedule D line 21, as a positive number. Losses up to the gains "
+        "are in capital_losses_allowed_against_gains."
+    )
     definition_period = YEAR
-    reference = "https://www.law.cornell.edu/uscode/text/26/1211"
+    reference = (
+        dict(
+            title="26 U.S. Code § 1211(b) - Limitation on capital losses",
+            href="https://www.law.cornell.edu/uscode/text/26/1211#b",
+        ),
+        dict(
+            title="2025 Schedule D (Form 1040), lines 16 and 21",
+            href="https://www.irs.gov/pub/irs-prior/f1040sd--2025.pdf#page=2",
+        ),
+    )
 
     def formula(tax_unit, period, parameters):
         p = parameters(period).gov.irs
         filing_status = tax_unit("filing_status", period)
         max_loss = p.ald.loss.capital.max[filing_status]
+        # As in capital_losses_allowed_against_gains: no capital loss
+        # deduction when a reform takes capital gains out of gross income.
+        if "capital_gains" not in p.gross_income.sources:
+            return 0 * max_loss
         # A tax-unit dependent's capital losses belong on the dependent's own
         # return, as in irs_gross_income.
         capital_losses = tax_unit_non_dep_sum("capital_losses", tax_unit, period)
-        return min_(max_loss, capital_losses)
+        # 26 U.S.C. 1211(b)(2): the excess of the losses over the gains.
+        excess = capital_losses - tax_unit(
+            "capital_losses_allowed_against_gains", period
+        )
+        return min_(max_loss, excess)
diff --git a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/loss_ald.py b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/loss_ald.py
index 8eedf2bcb62..d51b44af919 100644
--- a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/loss_ald.py
+++ b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/loss_ald.py
@@ -4,7 +4,7 @@
 class loss_ald(Variable):
     value_type = float
     entity = TaxUnit
-    label = "Business loss ALD"
+    label = "Business and capital loss ALD"
     unit = USD
     documentation = (
         "Above-the-line deduction from gross income for business and capital losses."
@@ -13,6 +13,7 @@ class loss_ald(Variable):
     reference = (
         "https://www.law.cornell.edu/uscode/text/26/165",
         "https://www.law.cornell.edu/uscode/text/26/461#l",
+        "https://www.law.cornell.edu/uscode/text/26/1211#b",
     )
 
     def formula(tax_unit, period, parameters):
@@ -91,7 +92,15 @@ def formula(tax_unit, period, parameters):
         max_deductible_business_loss = total_business_income + threshold_amount
         limited_business_loss = min_(total_business_loss, max_deductible_business_loss)
 
-        # Capital losses have separate limit under Section 1211 ($3,000)
+        # Section 1211(b) allows capital losses to the extent of capital
+        # gains, plus a net loss of up to $3,000.
+        capital_losses_allowed_against_gains = tax_unit(
+            "capital_losses_allowed_against_gains", period
+        )
         limited_capital_loss = tax_unit("limited_capital_loss", period)
 
-        return limited_business_loss + limited_capital_loss
+        return (
+            limited_business_loss
+            + capital_losses_allowed_against_gains
+            + limited_capital_loss
+        )
diff --git a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/filer_loss_limited_net_capital_gains.py b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/filer_loss_limited_net_capital_gains.py
index 6fbfd3451a7..120ca814d65 100644
--- a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/filer_loss_limited_net_capital_gains.py
+++ b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/filer_loss_limited_net_capital_gains.py
@@ -8,15 +8,17 @@ class filer_loss_limited_net_capital_gains(Variable):
     label = "Filer's loss-limited net capital gains"
     unit = USD
     documentation = (
-        "Schedule D net capital gain or loss of the head and spouse, with a "
-        "net loss limited under 26 USC 1211(b): the Schedule D part of Form "
-        "8960 line 5a. A tax unit dependent's gains and losses are on the "
-        "dependent's own return. Unlike loss_limited_net_capital_gains, this "
-        "leaves dependents out."
+        "Form 1040 line 7a of the head and spouse: their Schedule D net "
+        "capital gain or loss, including capital gain distributions (line "
+        "13), with a net loss limited under 26 USC 1211(b). This is Form 8960 "
+        "line 5a without Schedule 1 line 4. A tax unit dependent's gains and "
+        "losses are on the dependent's own return. Unlike "
+        "loss_limited_net_capital_gains, this leaves dependents out."
     )
     reference = (
         "https://www.law.cornell.edu/uscode/text/26/1211#b",
         "https://www.irs.gov/pub/irs-prior/i8960--2024.pdf#page=7",
+        "https://www.irs.gov/pub/irs-prior/i1040sd--2025.pdf#page=2",
     )
 
     def formula(tax_unit, period, parameters):
@@ -26,4 +28,12 @@ def formula(tax_unit, period, parameters):
         net_capital_gains = tax_unit_non_dep_add(
             tax_unit, period, ["long_term_capital_gains", "short_term_capital_gains"]
         )
-        return max_(-loss_limit, net_capital_gains)
+        # Capital gain distributions go on Schedule D line 13 with the other
+        # gains and losses, so they net before the limit. Each filer's input
+        # is floored at zero, as in irs_gross_income.
+        person = tax_unit.members
+        not_dependent = ~person("is_tax_unit_dependent", period)
+        distributions = tax_unit.sum(
+            not_dependent * max_(0, person("non_sch_d_capital_gains", period))
+        )
+        return max_(-loss_limit, net_capital_gains + distributions)
diff --git a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/has_qdiv_or_ltcg.py b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/has_qdiv_or_ltcg.py
index 2db8bf45bfc..ac66f03c566 100644
--- a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/has_qdiv_or_ltcg.py
+++ b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/has_qdiv_or_ltcg.py
@@ -5,22 +5,43 @@ class has_qdiv_or_ltcg(Variable):
     value_type = bool
     entity = TaxUnit
     label = "Has qualified dividends or long-term capital gains"
-    documentation = "Whether this tax unit has qualified dividend income or long-term capital gains income"
+    documentation = (
+        "Whether this tax unit figures its tax with the Qualified Dividends "
+        "and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet: it "
+        "has qualified dividends, or the head and spouse's Schedule D lines "
+        "15 and 16 are both more than zero. Capital gain distributions are on "
+        "Schedule D line 13, so a filer who reports them without Schedule D "
+        "has lines 15 and 16 equal to them."
+    )
     definition_period = YEAR
+    reference = (
+        dict(
+            title="2025 Instructions for Form 1040, line 16",
+            href="https://www.irs.gov/pub/irs-prior/i1040gi--2025.pdf#page=36",
+        ),
+        dict(
+            title="2025 Schedule D (Form 1040), lines 15 to 22",
+            href="https://www.irs.gov/pub/irs-prior/f1040sd--2025.pdf#page=2",
+        ),
+    )
 
     def formula(tax_unit, period, parameters):
-        # negatives amounts cannot offset other income sources
-        INCOME_SOURCES = [
-            "loss_limited_net_capital_gains",
-            "net_capital_gains",
-            "long_term_capital_gains",
-            "non_sch_d_capital_gains",
-            "qualified_dividend_income",
-        ]
-        return np.any(
-            [
-                add(tax_unit, period, [income_source]) > 0
-                for income_source in INCOME_SOURCES
-            ],
-            axis=0,
+        qualified_dividends = add(tax_unit, period, ["qualified_dividend_income"])
+        # Schedule D lines 15 and 16 of the head and spouse; a tax unit
+        # dependent's gains and losses are on the dependent's own return.
+        person = tax_unit.members
+        not_dependent = ~person("is_tax_unit_dependent", period)
+        distributions = tax_unit.sum(
+            not_dependent * max_(0, person("non_sch_d_capital_gains", period))
         )
+        # Line 15: net long-term capital gain or loss, including capital gain
+        # distributions (line 13).
+        line_15 = (
+            tax_unit_non_dep_add(tax_unit, period, ["long_term_capital_gains"])
+            + distributions
+        )
+        # Line 16: line 15 plus the net short-term gain or loss.
+        line_16 = line_15 + tax_unit_non_dep_add(
+            tax_unit, period, ["short_term_capital_gains"]
+        )
+        return (qualified_dividends > 0) | ((line_15 > 0) & (line_16 > 0))
diff --git a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/loss_limited_net_capital_gains.py b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/loss_limited_net_capital_gains.py
index 6aabd824a34..f7693680121 100644
--- a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/loss_limited_net_capital_gains.py
+++ b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/loss_limited_net_capital_gains.py
@@ -6,11 +6,44 @@ class loss_limited_net_capital_gains(Variable):
     entity = TaxUnit
     definition_period = YEAR
     label = "Loss-limited net capital gains"
+    documentation = (
+        "The capital gain or loss on Form 1040 line 7a: Schedule D line 16 "
+        "(long-term and short-term gains and losses, with capital gain "
+        "distributions on line 13), or line 21 if line 16 is a loss. A filer "
+        "with no other capital gains or losses reports the distributions "
+        "without Schedule D, and the amount is the same."
+    )
     unit = USD
+    reference = (
+        dict(
+            title="26 U.S. Code § 1211(b) - Limitation on capital losses",
+            href="https://www.law.cornell.edu/uscode/text/26/1211#b",
+        ),
+        dict(
+            title="2025 Schedule D (Form 1040), lines 13, 16 and 21",
+            href="https://www.irs.gov/pub/irs-prior/f1040sd--2025.pdf#page=2",
+        ),
+        dict(
+            title="2025 Instructions for Schedule D (Form 1040), Capital Gain Distributions",
+            href="https://www.irs.gov/pub/irs-prior/i1040sd--2025.pdf#page=2",
+        ),
+        dict(
+            title="2025 Instructions for Form 1040, line 7a, Exception 1",
+            href="https://www.irs.gov/pub/irs-prior/i1040gi--2025.pdf#page=31",
+        ),
+    )
 
     def formula(tax_unit, period, parameters):
         p = parameters(period).gov.irs
         filing_status = tax_unit("filing_status", period)
         loss_limit = p.capital_gains.loss_limit[filing_status]
         net_capital_gains = tax_unit("net_capital_gains", period)
-        return max_(-loss_limit, net_capital_gains)
+        # Capital gain distributions reported without Schedule D. A filer with
+        # capital losses or other capital gains files Schedule D and enters
+        # them on line 13, so they net against losses before the limit.
+        # Form 1099-DIV box 2a amounts are not negative; floor each person's
+        # input at zero, as irs_gross_income does.
+        distributions = tax_unit.sum(
+            max_(0, tax_unit.members("non_sch_d_capital_gains", period))
+        )
+        return max_(-loss_limit, net_capital_gains + distributions)
diff --git a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/loss_limited_net_capital_gains_person.py b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/loss_limited_net_capital_gains_person.py
index 4354058a947..74c84afb65a 100644
--- a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/loss_limited_net_capital_gains_person.py
+++ b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/loss_limited_net_capital_gains_person.py
@@ -7,11 +7,19 @@ class loss_limited_net_capital_gains_person(Variable):
     label = "Loss-limited capital gains (person)"
     unit = USD
     definition_period = YEAR
-    reference = "https://www.irs.gov/pub/irs-pdf/f1040sd.pdf"
+    documentation = (
+        "Each person's share of loss_limited_net_capital_gains: the person's "
+        "capital gains and losses plus capital gain distributions, with a "
+        "tax-unit net loss limited and allocated in proportion."
+    )
+    reference = "https://www.irs.gov/pub/irs-prior/f1040sd--2025.pdf#page=2"
 
     def formula(person, period, parameters):
-        # Get person's raw capital gains
-        person_capital_gains = person("capital_gains", period)
+        # The person's capital gains and losses, plus capital gain
+        # distributions, which go on Schedule D line 13 with them.
+        person_capital_gains = person("capital_gains", period) + max_(
+            0, person("non_sch_d_capital_gains", period)
+        )
 
         # Get tax unit totals
         tax_unit = person.tax_unit
diff --git a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/social_security/dependent_taxable_ss_magi.py b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/social_security/dependent_taxable_ss_magi.py
index 932e2011bb4..64d607bff9e 100644
--- a/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/social_security/dependent_taxable_ss_magi.py
+++ b/policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/irs_gross_income/social_security/dependent_taxable_ss_magi.py
@@ -58,10 +58,18 @@ def formula(person, period, parameters):
         ald = [deduction for deduction in p.ald.deductions if deduction not in revoked]
         deduct_losses = "loss_ald" in ald
 
+        # Capital gain distributions net with capital gains and losses on
+        # Schedule D (line 13), inside the IRC 1211(b) limit, below.
+        net_distributions = (
+            "capital_gains" in sources and "non_sch_d_capital_gains" in sources
+        )
+
         income = 0
         for source in sources:
             components = DEPENDENT_GROSS_INCOME_SOURCE_OVERRIDES.get(source, [source])
             for component in components:
+                if net_distributions and component == "non_sch_d_capital_gains":
+                    continue
                 amount = add(person, period, [component])
                 if deduct_losses and component in BUSINESS_LOSS_SOURCES:
                     income += amount
@@ -78,7 +86,12 @@ def formula(person, period, parameters):
                 capital_loss_limit["SEPARATE"],
                 capital_loss_limit["SINGLE"],
             )
-            income += max_(person("capital_gains", period), -loss_limit)
+            capital_gains = person("capital_gains", period)
+            if net_distributions:
+                capital_gains = capital_gains + max_(
+                    0, person("non_sch_d_capital_gains", period)
+                )
+            income += max_(capital_gains, -loss_limit)
 
         deductions = [
             PERSON_ABOVE_THE_LINE_DEDUCTIONS[deduction]
diff --git a/policyengine_us/variables/gov/states/dc/tax/income/additions/dc_self_employment_loss_addition.py b/policyengine_us/variables/gov/states/dc/tax/income/additions/dc_self_employment_loss_addition.py
index 1dbd86a21d7..9348a9f1b1e 100644
--- a/policyengine_us/variables/gov/states/dc/tax/income/additions/dc_self_employment_loss_addition.py
+++ b/policyengine_us/variables/gov/states/dc/tax/income/additions/dc_self_employment_loss_addition.py
@@ -19,8 +19,12 @@ def formula(person, period, parameters):
         # Cap at SE loss actually deducted in federal AGI via loss_ald.
         # loss_ald includes both SE and capital losses; isolate SE portion.
         loss_ald = person.tax_unit("loss_ald", period)
-        limited_capital_loss = person.tax_unit("limited_capital_loss", period)
-        se_loss_in_ald = max_(0, loss_ald - limited_capital_loss)
+        capital_loss_in_ald = add(
+            person.tax_unit,
+            period,
+            ["capital_losses_allowed_against_gains", "limited_capital_loss"],
+        )
+        se_loss_in_ald = max_(0, loss_ald - capital_loss_in_ald)
         effective_loss = min_(loss_taxunit, se_loss_in_ald)
         p = parameters(period).gov.states.dc.tax.income.additions
         addition_taxunit = max_(0, effective_loss - p.self_employment_loss.threshold)
diff --git a/policyengine_us/variables/gov/states/mi/tax/income/mi_household_resources.py b/policyengine_us/variables/gov/states/mi/tax/income/mi_household_resources.py
index 90853e92375..7bb62ea0b73 100644
--- a/policyengine_us/variables/gov/states/mi/tax/income/mi_household_resources.py
+++ b/policyengine_us/variables/gov/states/mi/tax/income/mi_household_resources.py
@@ -13,6 +13,10 @@ class mi_household_resources(Variable):
         "statute-act-281-of-1967/division-281-1967-1/division-281-1967-1-9/"
         "section-206-508/",
         "https://web.archive.org/web/20250202150154/https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/Forms/IIT/TY2024/BOOK_MI-1040CR-7.pdf",
+        # 2025 MI-1040 book, MI-1040CR lines 19 (capital gains) and 30
+        # (adjustments from U.S. Schedule 1).
+        "https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/"
+        "Forms/IIT/TY2025/MI-1040-Book.pdf#page=32",
     )
 
     def formula(tax_unit, period, parameters):
@@ -44,7 +48,15 @@ def formula(tax_unit, period, parameters):
                 total += add(tax_unit, period, [source])
 
         health_insurance_premiums = add(tax_unit, period, ["health_insurance_premiums"])
-        above_the_line_deductions = tax_unit("above_the_line_deductions", period)
+        # Line 30: "total adjustments from your U.S. Form 1040, Schedule 1".
+        # Capital losses are not Schedule 1 adjustments: they are already
+        # netted and limited in the capital gains line (Form 1040 line 7a),
+        # so the capital parts of loss_ald are not subtracted again.
+        above_the_line_deductions = tax_unit("above_the_line_deductions", period) - add(
+            tax_unit,
+            period,
+            ["capital_losses_allowed_against_gains", "limited_capital_loss"],
+        )
         return max_(
             0,
             total - health_insurance_premiums - above_the_line_deductions,
diff --git a/policyengine_us/variables/household/income/person/capital_gains/non_sch_d_capital_gains.py b/policyengine_us/variables/household/income/person/capital_gains/non_sch_d_capital_gains.py
index 3d1649588fb..ad4d944c6b7 100644
--- a/policyengine_us/variables/household/income/person/capital_gains/non_sch_d_capital_gains.py
+++ b/policyengine_us/variables/household/income/person/capital_gains/non_sch_d_capital_gains.py
@@ -6,5 +6,17 @@ class non_sch_d_capital_gains(Variable):
     entity = Person
     label = "Capital gains not reported on Schedule D"
     unit = USD
+    documentation = (
+        "Capital gain distributions (Form 1099-DIV box 2a) reported on Form "
+        "1040 line 7a without Schedule D. A filer who also has capital losses "
+        "or other capital gains enters them on Schedule D line 13, so the "
+        "model nets them with those gains and losses before the capital loss "
+        "limit (loss_limited_net_capital_gains, "
+        "capital_losses_allowed_against_gains and limited_capital_loss)."
+    )
+    reference = dict(
+        title="2025 Instructions for Schedule D (Form 1040), Capital Gain Distributions",
+        href="https://www.irs.gov/pub/irs-prior/i1040sd--2025.pdf#page=2",
+    )
     definition_period = YEAR
     uprating = "calibration.gov.irs.soi.long_term_capital_gains"