How Much Stock Loss Can You Deduct on Your Taxes?
Written by
John Csiszar
Edited by
Melanie Grafil, M.A., CHFC™
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You can deduct stock losses to offset capital gains — and if losses exceed gains, up to $3,000 per year against ordinary income, with the rest carried forward. Losses must be realized, meaning you actually have to sell the investment — paper losses don’t count. Here’s how the limits work, how to report losses, smart planning strategies and the most common mistakes to avoid.
What Counts as a Deductible Stock Loss? Realized vs. Unrealized
Realized Losses
A stock loss becomes deductible only when you sell the investment for less than what you paid for it. Until a sale happens, the IRS does not recognize the loss for tax purposes.
A loss becomes realized in the year in which you sell it, regardless of when you bought it. Only losses in taxable brokerage accounts qualify. Losses inside IRAs, 401(k)s and other tax-advantaged retirement accounts aren’t deductible.
Here’s an example:
- You bought a stock in 2022 for $5,000 and sold it in 2025 for $3,000.
- That $2,000 loss can potentially be deducted on your 2025 tax return.
Unrealized Losses
Unrealized losses are “paper losses,” not realized losses. The difference is that your paper loss cannot be deducted until you sell the asset.
Simple rule: Down 50% but still holding? Not deductible yet. Down 1% and sold the stock? That loss becomes realized and usable for tax purposes.
Quick clarity:
- Realized loss = sold the stock, potentially deductible
- Unrealized loss = still holding, not deductible
The IRS explains this distinction clearly in its capital gains and losses guidance.
How Much Stock Loss Can You Deduct Each Year?
Annual Deduction Limits
If your total capital losses exceed your capital gains, you can deduct up to:
- $3,000 per year against ordinary income for most filers
- $1,500 per year if married filing separately
This deduction reduces taxable income directly, similar to an above-the-line adjustment.
Carryforward Rules
If your losses exceed the annual limit, the unused amount carries forward to future years, with no expiration date. You can keep using those losses to offset future gains — or take additional $3,000 income deductions each year — until they’re fully used.
Simple scenario: You have a $10,000 net loss and no gains this year.
- Deduct $3,000 this year
- Carry forward $7,000 to future years
| Total Loss | Deducted This Year | Carried Forward |
|---|---|---|
| $10,000 | $3,000 | $7,000 |
You can learn more about loss limits in the Schedule D instructions published by the IRS.
Short-Term vs. Long-Term Losses — and Why It Matters
Short-Term Losses and Gains
Short-term investments are held one year or less. Short-term gains are taxed at ordinary income tax rates, which are usually higher than long-term capital gains rates. This is why it can be beneficial to hold your capital assets for longer than one year.
When it comes to offsetting losses, the IRS has a strict ordering protocol. Short-term losses first offset short-term gains.
Long-Term Losses and Gains
Long-term investments are held more than one year and benefit from preferential capital gains tax rates. Most long-term capital gains are taxed at 20%, 15% or 0%, depending on your income. Certain special types of investments, such as collectibles, carry a maximum 28% long-term capital gains tax rate, per the IRS.
In terms of pairing your gains and losses, long-term losses first offset long-term gains.
Order of Netting Explained
The IRS applies losses in a specific order:
- Net short-term gains and losses
- Net long-term gains and losses
- Combine any remaining amounts
- Apply up to $3,000 against ordinary income
This sequencing matters because offsetting higher-taxed short-term gains often delivers more tax savings than offsetting long-term gains, as short-term gains are taxed at ordinary income rates. If you’ve ever wondered why Schedule D looks more complicated than it should, this is why.
How To Report Stock Losses on Your Tax Return
Forms You’ll Need
- Form 8949: Reports individual investment sales
- Schedule D: Summarizes total gains and losses
- Form 1099-B: Provided by your brokerage
You can review the IRS instructions for Form 8949 and Schedule D for reference.
Information To Gather
- Purchase price (cost basis)
- Sale price
- Purchase date and sale date
- Any adjustments or corporate actions
Simple checklist:
- Confirm your brokerage reports match your records
- Review cost basis accuracy — especially for older holdings
- Keep trade confirmations and statements
Most brokerages automatically report sales to the IRS, but errors happen. Ultimately, accuracy is your responsibility.
Tax-Loss Harvesting — Using Losses Strategically
What Tax-Loss Harvesting Is
Tax-loss harvesting means intentionally selling losing investments to offset capital gains and reduce taxes.
When It May Make Sense
- You realized capital gains this year
- You don’t expect a quick rebound in the stock
- You’re in a higher tax bracket
Risks and Trade-Offs
- You could miss a market rebound
- You may change your portfolio allocation
- The wash sale rule can disallow the loss
Decision checklist:
- Do I actually need the loss this year?
- Am I comfortable being out of the position temporarily?
- Can I avoid triggering wash sale rules?
Reality check: This is a planning tool, not a guarantee. Sometimes reducing taxes this way makes sense, but it’s not automatic. In some cases, staying invested matters more.
Common Mistakes and Special Situations to Watch For
Wash Sale Rule
If you sell a stock at a loss and buy the same or a “substantially identical” investment within 30 days before or after the sale, the IRS disallows the loss.
| What It Is | How To Avoid It |
|---|---|
| If you sell a stock at a loss and rebuy the same or “substantially identical” stock within 30 days, the IRS won’t allow you to deduct the loss. | Wait at least 31 days before repurchasing the same stock. |
| This is known as the wash sale rule and it applies to stocks, options and mutual funds. | Instead of rebuying the same stock, consider a similar but not identical investment — like a different ETF. |
Worthless Stocks
If a company becomes completely worthless due to bankruptcy or liquidation, the loss may still be deductible. However, you’ll have to provide documentation that a stock formally became worthless. Simply losing value in the open market doesn’t qualify a stock for “worthless” status.
Where Losses Don’t Apply
Losses inside retirement accounts such as IRAs and 401(k)s are not deductible, even if the investment declines sharply and you realize the loss. This is because these are tax-advantaged accounts that don’t require the reporting of gains or losses on an annual basis, as regular brokerage accounts do.
Examples: How Stock Loss Deductions Work in Real Life
Example 1: Loss offsets gainsYou sell one stock for a $6,000 gain and another for a $4,000 loss. You only pay taxes on the $2,000 net gain.
Example 2: Loss exceeds gainsYou have no gains and $5,000 in losses. You deduct $3,000 this year and carry forward the remaining $2,000 loss into future years.
Example 3: Carryforward scenarioYou have a tax-loss carry-forward of $7,000 in total net losses from prior years. This year you realize a $5,000 gain. The gain is fully offset, leaving $2,000 available to offset ordinary income.
Key Takeaways at a Glance
- Losses must be realized to be deductible.
- Losses offset capital gains first.
- You can deduct up to $3,000 per year in excess losses against income.
- Unused losses can be carried forward indefinitely.
- Reporting requires Form 8949 and Schedule D.
- Wash sale rules can disallow deductions.
Final Things To Consider for the 2026 Tax Year
These rules remain in effect for the 2025 and 2026 tax years under current IRS guidance. Your actual tax savings depend on your income, filing status and holding periods. If you’re dealing with large losses, complex trades or multiple accounts, a qualified tax professional can help ensure proper reporting.
FAQs About Deducting Stock Losses
- Can I deduct a stock loss if I still own the stock?
- No. The loss must be realized through a sale. Paper losses don't qualify.
- What happens if I sell a stock at a loss and buy it back right away?
- If you repurchase the same or substantially identical investment within 30 days, the wash sale rule disallows the deduction.
- Can I deduct losses from mutual funds or ETFs?
- Yes. Mutual funds and ETFs held in taxable accounts follow the same capital loss rules as individual stocks.
- How long can I carry forward capital losses?
- There's no expiration. Losses carry forward until fully used.
- Does the $3,000 limit change if I'm married filing separately?
- Yes, the annual limit drops to $1,500 per spouse.
Caitlyn Moorhead contributed to the reporting of this article.
Information is accurate as of Jan. 15, 2026.
Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.
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