How to deduct stock losses from your taxes (2024)

How to deduct stock losses from your taxes (1)

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.

It’s easy to find a qualified financial advisor to guide you through life’s most important financial decisions.

Try Bankrate’s free AdvisorMatch service to quickly get connected to a CFP® professional who can help you achieve your financial goals.

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 (2024)

FAQs

How to deduct stock losses from your taxes? ›

How Do I Deduct Stock Losses

Losses
What Is 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.
https://www.investopedia.com › terms › capitalloss
on My Tax Return? You must fill out IRS Form 8949 and Schedule D to deduct stock losses on your taxes. Short-term capital losses are calculated against short-term capital gains to arrive at the net short-term capital gain or loss on Part I of the form.

Can you write off 100% of stock losses? ›

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.

Why are my capital losses limited to $3000? ›

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated. The $3,000 loss limit rule can be found in IRC Section 1211(b). For investors with more than $3,000 in capital losses, the remaining amount can't be used toward the current tax year.

How do I add capital losses to my tax return? ›

Claim the loss on line 7 of your Form 1040 or Form 1040-SR. If your net capital loss is more than this limit, you can carry the loss forward to later years.

How do I write off stock losses on TurboTax? ›

You report the loss on Schedule D of your tax return, and list it as though it were an asset sold on the last day of the year. TurboTax easily guides you through the interview and puts your tax information on the appropriate forms so you can take this deduction.

Is it worth claiming stock losses on taxes? ›

Sophisticated investors who know the rules can turn their losing investment picks into tax savings. By making careful use of capital losses to offset capital gains, you can lower your tax bill over the course of several years. You can also strengthen and diversify your investment portfolio in the process.

How much stock loss can you write off single? ›

If you don't have capital gains to offset the capital loss, you can use a capital loss as an offset to ordinary income, up to $3,000 per year. If you have more than $3,000, it will be carried forward to future tax years."

What is the $3000 loss rule? ›

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.

Do stock losses offset income? ›

Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.

Do you pay capital gains after age 65? ›

This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the 'tax basis'.

How long can capital loss be carried forward? ›

You can carry over capital losses indefinitely. Figure your allowable capital loss on Schedule D and enter it on Form 1040, Line 13. If you have an unused prior-year loss, you can subtract it from this year's net capital gains.

What kind of losses are tax deductible? ›

Casualty and theft losses are deductible losses that arise from the destruction or loss of a taxpayer's personal property. To be deductible, casualty losses must result from a sudden and unforeseen event. Theft losses generally require proof that the property was actually stolen and not just lost or missing.

How are stock losses written off? ›

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.

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.

How do I write-off worthless stock on 1040? ›

Report the valueless stock in either Part I or Part II of Form 8949, depending on whether it was a short-term or long-term holding. If an asset became worthless during the tax year, it is treated as though it were sold on the last day of the year.

How much stock loss can I carry over? ›

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 write off stock losses with standard deduction? ›

You can, but only up to a set limit. The IRS allows you to deduct up to $3,000 in losses if you're filing as a single individual or filing jointly. If you're married but filing jointly, you can deduct $1,500. Anything more than these limits can be carried over and deducted from your taxable income in the next year.

Can I write off worthless stock? ›

Bottom line. If you have a worthless asset, you can claim your tax write-off and reduce your taxable income. But it's important that you follow the IRS procedures, because your brokerage may not report your loss on worthless securities that remain in your account if you can't dispose of them.

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