Even the best investors pick a loser now and then. Fortunately, you get to take some of the sting out of capital losses by writing them off on your tax return. The Internal Revenue Service has rules that determine when you can deduct short-term and long-term losses to offset capital gains. Familiarity with these rules will help you avoid mistakes on your return and maybe save you some money.
Capital investments can be stocks, bonds, real estate, collectibles and many other kinds of property. A short-term capital gain or loss occurs own you own the asset for one year or less. If you hold an asset for more than a year, it’s a long-term gain or loss. The long-term capital gains tax rate is 15 percent except for certain types of real estate, small business stock and collectibles. These exceptions may be taxed at up to 25 or 28 percent. Short-term capital gains are taxed like your other income. The maximum rate on short-term gains as of 2013 was 39.6 percent, up from 35 percent in 2012.
Sorting Out Gains and Losses
IRS rules say you have to follow a step-by-step process when figuring capital gains and losses. First, use capital losses to offset gains of the same type and find your net gain or loss. This means you subtract the total of your short-term losses from your total short-term capital gains to find your net short-term gain or loss. Do the same for your long-term gains and losses.
When you have a net long-term capital loss, you can use it to offset a net short-term capital gain by subtracting the loss from the gain. For example, if you have a net long-term loss of $15,000 and a net short-term gain of $10,000, you can use $10,000 of the long-term loss to offset the short-term gain. This works in the opposite direction as well. That is, you have to use a net short-term loss to offset a net long-term gain.
Suppose you use a net long-term loss to offset all of your short-term gain and have $5,000 net loss still left over. You may use up to $3,000 to offset other income. In this example, that still leaves $2,000 of net loss that you can’t use to offset anything, meaning you can’t use it as a tax deduction for the current year. However, any leftover capital losses, either short-term or long-term, can be carried over to future years and used to offset future income.
- IRS: Topic 409 – Capital Gains and Losses
- Forbes: Updated: 2013 Federal Income Tax Brackets and Marginal Rates
- TurboTax: Deducting a Capital Loss
- Internal Revenue Service. "Topic No. 409, Capital Gains and Losses." Accessed Dec. 11, 2019.
- Internal Revenue Service. "2019 Instructions for Schedule D," Page 4. Accessed Dec. 11, 2019.
- Internal Revenue Service. "Helpful Facts to Know about Capital Gains and Losses." Accessed Dec. 11, 2019.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.