When the market drops, many people look to save money wherever they can, including on taxes. The Internal Revenue Service allows you to take a deduction for the amount that your investment losses exceed your capital gains. The deduction is included as part of your income, so you don't have to itemize your deductions or give up the standard deduction to claim the loss. To claim a loss on your investments on your tax return, you must file your taxes using Form 1040.
Determine your total capital gains for the year. Capital gains are your profits on any stocks that you sold after holding them for more than one year. If you did not sell any stocks at a profit, you have no capital gains.
Determine the amount of losses you had from stocks sold during the year. The size of the loss is measured by the price you paid for the stock, not the price at the beginning of the year or the stock's highest price. For example, if you bought a stock in 2006 for $12,000 and sold it in 2009 for $3,000, your loss would be $9,000 regardless of how high the price went up or what the stock was worth at the start of 2009.
Subtract your losses from Step 2 from the gains in Step 1. If the result is less than zero, you can take a deduction for your investment losses. For example, if you had no capital gains and $9,000 in losses, you would be eligible to claim a deduction.
Complete IRS Schedule D (see Resources) to document your gains and losses. The amount of your deduction will be listed on Line 21. The IRS limits the deduction to $3,000 per year, unless you file your taxes as married filing separately, in which case the limit equals $1,500.
Claim your deduction by writing the amount of your loss on Line 13 of your Form 1040 tax return.
Tips
If your losses exceed the limit, you can carry the excess to future years. For example, if your losses were $9,000, you can carry forward the $6,000 you don't claim to the next tax year, to offset gains that year. If in the next year you have a net gain of $4,500, you could use the $6,000 to take a $1,500 deduction.
Warnings
You cannot claim a loss on a stock sale if you buy the stock back within 30 days before or after the sale. For example, if you sell your 300 shares of stock A at a $4,500 loss on Dec. 20 but buy back the same amount of shares on Jan. 4, you cannot claim a loss for that stock. If you bought 300 shares of stock A on Dec. 5 and sold them Dec. 20, you would also not be able to claim any losses.
References
- IRS: Publication 550
- The Motley Fool: Tax Loss Rules for Selling Stock
- Internal Revenue Service. "2018 Instructions for Schedule D: Capital Gains and Losses," Page 4. Accessed Nov. 25, 2019.
- Internal Revenue Service. "Topic No. 409 Capital Gains and Losses." Accessed Nov. 25, 2019.
- Internal Revenue Service. "Topic No. 703 Basis of Assets." Accessed Nov. 25, 2019.
- Internal Revenue Service. "2018 Publication 550 Investment Income and Expenses," Page 40. Accessed Nov. 25, 2019.
- Internal Revenue Service. "2018 Instructions for Form 8949 Sales and Other Dispositions of Capital Assets," Page 3. Accessed Nov. 25, 2019.
- Internal Revenue Service. "2018 Instructions for Schedule D Capital Gains and Losses," Page 12. Accessed Nov. 25, 2019.
- Internal Revenue Service. "2018 Instructions for Schedule D Capital Gains and Losses," Page 11. Accessed Nov. 25, 2019.
- Internal Revenue Service. "Losses (Homes, Stocks, Other Property)." Accessed Nov. 25, 2019.
- Internal Revenue Service. "2018 Instructions for Schedule D Capital Gains and Losses," Pages 5 & 6. Accessed Nov. 25, 2019.
Tips
- If your losses exceed the limit, you can carry the excess to future years. For example, if your losses were $9,000, you can carry forward the $6,000 you don't claim to the next tax year, to offset gains that year. If in the next year you have a net gain of $4,500, you could use the $6,000 to take a $1,500 deduction.
Warnings
- You cannot claim a loss on a stock sale if you buy the stock back within 30 days before or after the sale. For example, if you sell your 300 shares of stock A at a $4,500 loss on Dec. 20 but buy back the same amount of shares on Jan. 4, you cannot claim a loss for that stock. If you bought 300 shares of stock A on Dec. 5 and sold them Dec. 20, you would also not be able to claim any losses.
Writer Bio
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."