How To Deduct Stock Losses From Your Taxes | Bankrate (2024)

Investing and taxes go hand-in-hand. When you sell a stock for a profit inside a taxable brokerage account, you’ll owe taxes on the realized gain.

But the Internal Revenue Service (IRS) offers tax breaks as well, including the ability for investors to deduct stock losses. These losses, called capital losses, serve to lower your taxable income and reduce your tax bill.

Here’s how to deduct stock losses from your taxes and what to watch out for.

Writing off your losing stock trades: How it works

The IRS allows you to deduct from your taxable income a capital loss, for example, from a stock or other investment that has lost money. Here are the ground rules:

  • An investment loss has to be realized. In other words, you need to have sold your stock to claim a deduction. You can’t simply write off losses because the stock is worth less than when you bought it.
  • You can deduct your loss against capital gains. Any taxable capital gain – an investment gain – realized in that tax year can be offset with a capital loss from that year or one carried forward from a prior year. If your losses exceed your gains, you have a net loss.
  • Your net losses offset ordinary income. No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill.
  • Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).
  • Any unused capital losses are rolled over to future years. If you exceed the $3,000 threshold for a given year, don’t worry. You can claim the loss in future years or use it to offset future gains, and the losses do not expire.
  • You can reduce any amount of taxable capital gains as long as you have gross losses to offset them. For example, if you have a $20,000 loss and a $16,000 gain, you can claim the maximum deduction of $3,000 on this year’s taxes, and the remaining $1,000 loss in a future year. Again, for any year the maximum allowed net loss is $3,000.
  • The last day to realize a loss for the current calendar year is the final trading day of the year. That day might be December 31, but it may be earlier, depending on the calendar.

You can enter any stock gains and losses on Schedule D of your annual tax return, and the worksheet will help you figure out your net gain or loss. You may want to consult with a tax professional if your situation is complicated.

It’s also important to know that short-term losses offset short-term gains first, while long-term losses offset long-term gains first. However, once losses in one category exceed the same type, you can then use them to offset gains in the other category. Short-term gains and losses are for assets held less than one year, while long-term gains and losses are for assets held longer than a year.

Because short-term gains and long-term gains may be taxed at different rates, you’ll need to keep your gains and losses straight as you strategically plan your taxes.

In general, long-term capital gains are treated more favorably than short-term gains. So you may consider taking a loss sooner than you might otherwise, in order to minimize your taxes. Or you might try to use low-tax long-term gains to offset more highly taxed short-term gains.

In fact, many investors strategically plan when and how they’re going to realize their losses to ensure they minimize their taxable income each year, typically by realizing investment losses near the end of the tax year. It’s a process called tax-loss harvesting, and it can save you real money. However, tax-loss harvesting is not restricted to year-end, and it can be a useful practice during the year.

Deducting a loss is valuable only in a taxable account, not tax-advantaged retirement accounts, such as IRAs and 401(k)s, where capital gains aren’t taxed.

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How to determine your capital losses

Capital gains and losses are divided between long-term and short-term gains and losses. When you have both long-term and short-term gains and losses in a given tax year, there are ordering rules that need to be used in matching capital gains and capital losses.

  • Long-term capital gains and losses occur after the security has been held for at least one year. Meanwhile, a short-term gain or loss applies to securities that were sold or disposed of after holding for less than a year.
  • Long-term capital gains and losses should be netted against each other as should short-term gains and losses. For example, you might have realized $500 in profit on one long-term holding, while losing $200 on another, which would result in a net $300 long-term gain for the year. Use the same process to calculate your net on short-term gains.
  • Next, the net long-term gain or loss should be netted against the net short-term gain or loss.
  • Whatever is left after this netting process will be taxed accordingly if the net result is either a long- or short-term capital gain, or deductible as described above if a net capital loss.
  • If possible, your tax-loss harvesting efforts should try to avoid a net short-term capital gain as these gains are taxed at your ordinary income tax rate versus the generally preferable long-term capital gains rates. This will help minimize taxes on your investments each year.

Bankrupt companies are an exception to be aware of

If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.

The IRS will expect you to have sufficient documentation of your cost basis in the stock to show the amount you lost in this situation. There is no need to actually sell the shares to claim a capital loss.

How much can you save by claiming a stock loss?

So how much does claiming a stock loss save you on your taxes? The answer to that question depends on your tax bracket and whether your loss is offsetting a taxable gain or ordinary income:

  • If you’re offsetting a taxable gain with a loss, then you’re saving the tax on the gains that you would otherwise have paid, and that figure can vary based on whether the gain was long-term or short-term.
  • If you’re claiming a net loss, however, it’s easier to show how much you can save. Federal tax brackets run from 10 percent to 37 percent. So a $3,000 loss on stocks could save you as much as $1,110 at the high end (37 percent * $3,000) or as little as $300 if you’re in the lowest tier.

And if you pay state taxes, then you may be able to save another 4 to 6 percent or more on top of these rates.

This kind of tax savings is why some people ensure that they’re claiming this loss every year.

Limits on the deduction – the wash-sale rule

The IRS does limit your ability to claim a deduction on stock losses, so that you don’t game the system. The IRS will not let you write off what’s called a wash sale. A wash sale occurs when you take a loss on an investment and buy a “substantially identical” investment within 30 days before or after.

If you try to claim a wash sale as a deduction, the IRS will reject your deduction. You won’t ultimately lose the deduction, but you won’t be able to claim it until you stay out of the investment for at least that 30-day period following the loss. When you sell the repurchased stock later, even years later, you can claim the loss.

And don’t try any fancy footwork to try to dodge the rule. You can’t sell the stock and claim the loss, and then have your spouse repurchase the stock within the 30 days. If your partner is buying the stock in that 30-day window, you simply won’t be able to claim the loss.

Selling an investment in a taxable account and then repurchasing the same investment in a retirement account like an IRA within the wash-sale window will also negate your ability to claim the loss.

Some traders may try to buy the stock before they try to claim the loss, but that won’t work either. For example, a trader may have 100 shares of a losing stock that they want to get rid of for a tax write-off. The trader then buys 100 shares of the same stock, and a week later sells 100 shares. That would still be a wash sale since it came within that 30-day window before the sale.

Note that it’s perfectly fine to sell an investment within 30 days and claim a loss. The key element of the wash sale is to repurchase the stock within that 30-day window.

Bottom line

Deducting a stock loss from your tax return can be a savvy move to reduce your taxable income, and some investors take great pains to ensure that they’re getting the most out of this rule each year. However, you might want to be careful that you’re not selling a stock just to get the tax break if you think it’s a good long-term investment. Selling an otherwise good stock at a low point may mean you’re selling just as it’s about to rebound.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

How To Deduct Stock Losses From Your Taxes | Bankrate (2024)


How To Deduct Stock Losses From Your Taxes | Bankrate? ›

You can't simply write off losses because the stock is worth less than when you bought it. You can deduct your loss against capital gains. Any taxable capital gain – an investment gain – realized in that tax year can be offset with a capital loss from that year or one carried forward from a prior year.

Is it worth claiming stock losses on taxes? ›

Those losses that you took in the previous calendar year in your portfolio can now be used to save you some money. When filing your taxes, capital losses can be used to offset capital gains and lower your taxable income. This is the silver lining to be found in selling a losing investment.

How can I deduct more than 3000 capital losses? ›

Capital losses that exceed capital gains in a year may be used to offset capital gains or as a deduction against ordinary income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.

Can you claim tax back on stock losses? ›

Losses made from the sale of capital assets are not allowed to be offset against income, other than in very specific circ*mstances (broadly if you have disposed of qualifying trading company shares). You cannot claim a loss made on the disposal of an asset that is exempt from capital gains tax (CGT).

How do you write off stocks on taxes? ›

Normally this process is straightforward. You realize the loss by selling the investment, and your broker records the loss on its annual Form 1099-B for your account. Then you report the loss on Schedule D when tax time rolls around and you get your tax write-off.

Can you write off 100% of stock losses? ›

If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.

How many years can stock losses be carried forward? ›

If the net amount of all your gains and losses is a loss, you can report the loss on your return. You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.

What is the $3000 loss rule? ›

The IRS allows investors to deduct up to $3,000 in capital losses per year. The $3,000 loss limit is the amount that can be offset against ordinary income.

How much stock loss can you write off? ›

You can then deduct $3,000 of your losses against your income each year, although the limit is $1,500 if you're married and filing separate tax returns. If your capital losses are even greater than the $3,000 limit, you can claim the additional losses in the future.

What is the maximum write off for stock loss? ›

You can use a capital loss to offset ordinary income up to $3,000 per year If you don't have capital gains to offset the loss. You can take a total capital loss on the stock if you own stock that has become worthless because the company went bankrupt and was liquidated.

Do I get a tax break if I sell stock at a loss? ›

Tax-loss harvesting helps investors reduce taxes by offsetting the amount they have to claim as capital gains or income. Basically, you “harvest” investments to sell at a loss, then use that loss to lower or even eliminate the taxes you have to pay on gains you made during the year.

How do you write off worthless stocks? ›

In some cases, stock you own may have become completely worthless. If so, you can claim a loss equal to your basis in the stock, which is generally what you paid for it. The stock is treated as though it had been sold on the last day of the tax year.

What happens if you sell stocks at a loss? ›

Stocks sold at a loss can be used to offset capital gains. You can also offset up to $3,000 a year of ordinary income. A silver lining of investment losses is that you can lower your tax liability as a result.

Can I use more than $3000 capital loss carryover? ›

The IRS caps your claim of excess loss at the lesser of $3,000 or your total net loss ($1,500 if you are married and filing separately). Capital loss carryover comes in when your total exceeds that $3,000, letting you pass it on to future years' taxes. There's no limit to the amount you can carry over.

Should I sell stocks at a loss? ›

An investor may also continue to hold if the stock pays a healthy dividend. Generally, though, if the stock breaks a technical marker or the company is not performing well, it is better to sell at a small loss than to let the position tie up your money and potentially fall even further.

What qualifies as a capital loss? ›

A capital loss is the loss incurred when a capital asset, such as an investment or real estate, decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.

Do you have to report stocks on taxes if you didn't sell? ›

You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes. You'll need to adjust your basis per share of the stock. For example, you own 100 shares of stock in a corporation with a $15 per share basis for a total basis of $1,500.

What is the last day to sell stock for tax loss? ›

Sell at year-end and re-buy when January starts

You'll only have until the end of the calendar year to position your portfolio to be in compliance. So you must clear wash sales by Dec. 31 to be able to claim any associated loss on that year's tax return.


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