Can capital losses in the year of death be carried back to earlier tax returns?

Yes, and the year-of-death rules are more generous than the ordinary capital loss rules. Normally, a capital loss can only be used against capital gains, with a three-year carryback and an indefinite carryforward. In the year of death, though, a net capital loss on the deceased's terminal return can be carried back and applied not just against capital gains in the three preceding years, but in certain circumstances against other income in the year of death and the immediately preceding year as well — a special accommodation that recognizes death often triggers a large, one-time deemed disposition that wouldn't otherwise have an offsetting gain to absorb it.

This is particularly relevant where the estate elected out of the spousal rollover on some property to create a gain, or where other assets generated losses at death that wouldn't otherwise be usable. Because these are elections with specific ordering rules and deadlines tied to the terminal and prior-year returns, and because they interact with other year-of-death choices like the rights-or-things return, they need to be coordinated as part of preparing the deceased's final returns rather than decided asset by asset after the fact.