The opening 90 minutes ended in a 1-1 draw with Fernandinho opening the scoring with City before Coutinho scored a late equaliser for the Reds.
Neither side were able to score a winner during regulation and extra time sending the game to a penalty shoot-out.
The shoot out could not have started better for the Reds. Emre Can stepped up and scored a cheeky panenka while City missed their first spot kick.
Liverpool went onto miss all their remaining penalties while City converted all of theirs to win the cup.
Liverpool v Manchester City
Kick-off: 16:30 (GMT)
Liverpool confirmed line-up: Mignolet, Clyne, Lucas, Sakho, Moreno, Can, Henderson, Milner, Firmino, Coutinho, Sturridge
Subs: Bogdan, Toure, Benteke, Lallana, Allen, Origi, Flanagan
Manager: Jurgen Klopp
Manchester City confirmed line-up: Caballero, Sagna, Kompany (C), Otamendi, Clichy, Fernando, Fernandinho, Toure, Silva, Sterling, Aguero
Subs: Hart, Kolarov, Zabaleta, Demichelis, Navas, Iheanacho, Bony
Goals: 49′ Fernandinho, 83′ Coutinho