If you've lost money on your investments, there's one small consolation. You can deduct some of those losses when filing your tax returns. However, a write-off and deduction are two different things, and it's hard to qualify for the first category. If you do have the misfortune of experiencing a true write-off, you can file an amended return up to seven years after the date of your original tax return.
True Write-Offs
For you to actually write off an investment on your taxes, it must be worth absolutely nothing. That's right -- zilch. That doesn't mean the company has declared bankruptcy or the stock is now worth just pennies. If your investment has become truly worthless, you must fill out Form 8949 on your federal tax return. Be prepared to thoroughly document the investment's worthlessness for the Internal Revenue Service. You can use the loss to offset ordinary income up to $3,000 for that year. If the loss is greater, you can carry the balance forward in future years.
Tax Deductions
If you've sold your investment at a loss, you can take a deduction. You must prove that the stock had a certain value but lost money by the time you sold it. If you held the investment more than a year, it's a long-term loss; less than a year, it's short-term. Each are calculated differently. The provision for losses is the same as for write-offs, but you have only three years to file an amended return. Report capital losses on Schedule D of your return and line 13 on form 1040.
