How To Deduct Stock Losses From Your Tax Bill
Navigating the stock market can be tricky enough, so it is even less fun to try and figure out how to file those gains or losses when it comes time for tax season. Any investment loss is tough, but there might be some salve for that wound if you know how to deduct stock losses from your tax bill.
Read: 3 Ways Smart People Save Money When Filing Their Taxes
How Writing Off Stock Losses Works
If you are an investor and have experienced capital gains or excess losses it is important to know that you can use these losses to offset the amount you owe on your tax return.
Good To Know
- You can use capital losses to offset capital gains during a taxable year, which means you are allowed to remove some income from your tax return based on the loss.
- Though there is a maximum of $3,000 per year, you can also use a capital loss as an offset to ordinary income.
- You have to fill out Form 8949 and Schedule D for your tax return in order to deduct your stock market losses.
- Owning a stock that no longer has value due to the company going bankrupt and being liquidated means you can take a total capital loss.
About Stock Losses
Stock market losses are referred to as capital losses or capital gain losses. Though it may sound convoluted, these are not to be confused with capital gains which are stock market profits. The definition gets even stickier when it comes to income taxes as they must be considered “realized” capital losses.
A stock loss is only a realized capital loss after the point of sale of the capital asset. A capital asset includes stocks, bonds, real estate or mutual fund shares.
- Capital gain: The profit you receive when you sell stocks, bonds or real estate which are considered capital assets.
- Short-term gains: Selling assets you have owned for one year or less.
- Long-term gains: Selling assets you have owned for more than one year and are taxed at varying rates depending on your taxable income.
- Capital loss: When you lose on the selling of an investment of a capital asset. These can generally be used to offset other capital gains or other income.
How To Deduct Stock Losses From Your Taxes
Though you can deduct stock losses from your tax bill, there are limitations. Typically, any losses on investments are used to offset capital gains in the same vein. For example, short-term losses would be deducted against your short-term capital gains just as long-term losses would be deducted against long-term capital gains.
In other words, if you are not showing a gain for the year but rather an overall net capital loss for the year, you can deduct up to $3,000 of that loss against either your salary income or interest income. If your net capital loss is more than $3,000 it can roll over to subsequent tax years.
It is important to note that your filing status will affect the deduction cap for tax purposes. For example, if you are married but filing separately your annual net capital loss deduction limit is only $1,500.
The Wash Sale Rule
The IRS defines something as a wash sale when you try to sell stock at the end of the year and then repurchase the stock within 30 days. Though it may be tempting to do this to cash in on some deductible capital losses, if it is deemed a wash sale it will not be recognized for tax purposes. You are always weighing the short-term and long-term benefits of buying and selling, but be aware of what a wash sale is, and try to avoid it.
Deducting any stock losses from your tax bill might take a little sting out of the situation and prevent you from losing more money overall. If you aren’t sure whether or not your losses are deductible, be sure to seek the guidance of a tax professional. This way you can make sure you are maximizing your efforts to minimize your tax bill.
FAQHere are the answers to some commonly asked questions about stock losses.
- Is it worth claiming stock losses on taxes?
- It is worth claiming stock losses on your taxes if you have an overall net capital loss for the year. This means you can deduct up to $3,000 of that loss against either your salary income or interest income. If your net capital loss exceeds $3,000 you can carry it over to subsequent tax years.
- Are stock losses 100% tax deductible?
- No, stock losses are not 100% deductible but you can deduct up to $3,000 of that loss against either your salary income or interest income.
Information is accurate as of Feb. 8, 2023.
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- TurboTax. 2022. "Capital Gains and Losses."