When your stock trade turns ugly and it’s become clear you won’t make money, you need to consider how to claim a loss on your taxes. The IRS places limits on which trades qualify for claims, so understanding the rules will help save some time before you start filling out tax forms. Luckily, once you’ve determined that you qualify, the process is fairly straightforward to salvage some of your losses by making a claim on your tax return.
Check your trade to make sure it isn’t a wash sale. The IRS states that a wash sale occurs when you acquire or buy a substantially identical position or option to buy an identical stock to the one you sold within 30 days of your initial stock sale. Wash sales you’ve made can’t be claimed on your tax return.
Read your statement and see if the account you traded your stock in was qualified or non-qualified. Any losses you incurred inside of a qualified account, such as your 401(k), IRA or Roth IRA can’t be claimed on your taxes. These types of tax shelters require no reporting of capital gains or losses and you’ll only file a tax return when you remove money from the account.
Sell the stock. You won’t be able to claim the loss on your taxes until the stock is sold from your portfolio. Track the amount you paid for the purchase and sale of your stock also. These fees count toward the total loss when you’re making your claim on the tax return.
Calculate your total loss by adding the price of your purchase and sale of the stock to the total loss you incurred while you owned the position. This is the total amount of your claim you’ll use on your tax return.
Review the maximum loss rules before filling out your tax forms. You can deduct a total net loss of $3,000 in any single tax year. Although you will be able to use the entire loss, any leftover amount above $3,000 is stockpiled on your tax return to claim in future years.
Complete IRS Schedule D and the Capital Loss Carryover Worksheet on page D-7 of the Schedule D instructions to claim your stock trade loss. The form requires the name of the asset, total cost of the stock purchase and your total proceeds. Part I of the form is used for any assets held one year or less, while Part II you’ll complete if you held the stock more than one year. Use the carryover worksheet to claim losses from previous years.
As a former financial advisor to companies and individuals for 16 years, Joe Andrews knows financial planning and marketing from start-ups to personal budgets. He also writes on motor racing, board games and travel. Andrews received his B.A. from Michigan State University in English. He is currently working on a young adult novel.