A mutual fund investment that has fallen in value qualifies as a capital loss. You may claim a loss only if the loss has been "realized," meaning the mutual fund shares were sold and you received less from the sale than the amount you invested. Any dividend or capital gains distribution reinvested into shares of the account increase your invested amount, or "basis," increasing the size of your capital loss. Losses from a mutual fund sale will be combined on your tax return with gains and losses from other investments sold during the year.
Review your purchases of the mutual fund shares and separate them into those owned for longer than one year and those owned for one year or less at the time of sale. Reporting rules for capital gains and losses require the separation of long-term -- more than one year -- and short-term sold investment positions. With a mutual fund account it is very possible to have both short- and long-term holdings.
List in separate columns the amount of money invested and number of shares purchased for each long-term investment in the fund and each short-term investment. Include any reinvested dividends or capital gains. Calculate the total amount invested and classify them as a long- or short-term investment.
Calculate the amount received from the sale of the mutual fund shares, separating the shares into the long- and short-term holdings. Use the share price received on the date you sold the mutual fund holding for a loss and the calculated numbers for short- and long-term shares.
Enter your mutual fund purchase and sales data onto the appropriate section of the IRS Form 8949, Sale and Other Dispositions of Capital Assets. Part I of the form is for short-term gains and loss and Part II is where you enter any long-term gains or losses. The capital gains and losses from all of your investment activity for the year will go on this form.
Total the sales price and cost basis columns in the two sections of Form 8949 and transfer the results to IRS Form 1040 Schedule D, Capital Gains and Losses. Calculate the differences between cost and sales prices, following the directions on Schedule D, to determine your total capital gains or losses for the year.
Transfer the smaller of your calculated capital loss or $3,000 to the correct line on your income tax form as directed in the final section of Schedule D. With capital losses you can only deduct up to $3,000 in one year against other income. If your loss is greater than $3,000, the excess loss can be carried forward and deducted in future tax years.
Items you will need
- Mutual Fund Year End Account Statements
- Form 1099 From Mutual Fund Company
- IRS Form 8949
- IRS Schedule D
- The year-end statement from your mutual fund company will list all of the transactions for the year. Use the year-end statement for each year you owned the fund to separate out long- and short-term investment amounts. The Form 1099 from the mutual fund company should also list short- and long-term investment holdings and sales separately. Compare the 1099 results with the data from your mutual fund statements.
- Capital losses from investments are first used to offset any capital gains. Losses in excess of gains can be used to reduce other earned income to the $3,000 per year limit. It is important to understand all of your gains and losses are combined to determine if you have a net loss, which can then be used as a deduction.
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