Watching the market lose money is frustrating, but every cloud has a silver lining. You can take tax deductions for your stock market losses, up to a certain amount. Those deductions can offset your income or gains from other investments. Keep in mind, too, that technically you haven't lost any money until you sell, and if you hang in there, those stocks might bounce back.
As the stock market rises and falls, your gains and losses are just paper losses. It may be disheartening to see the value of your assets decline, but the loss is not etched in stone until the day you sell. There are no immediate tax consequences on paper losses, but taxes come into play once you sell your stocks.
Tax Implications from Sales
When you sell, the difference between your cost basis and the sales price is either a capital gain or a capital loss. If your capital losses exceed your capital gains, you may deduct the losses from your income taxes, up to a maximum annual limit of $3,000, or $1,500 if you are married filing separately. If your losses one year exceed $3,000 you may carry over the unused portion of the loss into the next year's taxes. For example, if you have capital losses of $9,000, you may deduce $3,000 per year for the next three years. Make sure you do not buy back into the same mutual fund or stock within 30 days, because tax rules prohibit you from then claiming the capital loss.
Losses and Mutual Funds
If you hold stocks as part of mutual funds, the situation is a little different. Fund managers regularly buy and sell stocks within the fund. You always pay taxes on ordinary gains and dividends. Even when the stock market is down, a fund can still post a gain if it sold stocks that had been held for a long time and made money over the long term. Mutual funds cannot pass along losses to shareholder in the same way they do gains. Losses can stay on the books and be used to offset future gains within the fund for up to seven years, but they are not directly passed to individuals. If you sell your mutual fund shares at a loss, however, you can take a capital loss tax deduction just like you do with individual stocks.
Losses and Retirement Accounts
Stock market losses within retirement accounts have no direct impact on your personal income taxes. Since you do not pay taxes on gains or dividends, you also do not take losses from declines. When you reach retirement age and start to take distributions from a 401(k), traditional IRA or similar account, the distributions are treated as ordinary income without regard for gains or losses. Roth IRAs are tax free, so stock market losses affect the overall value of the asset but not taxes.
- Internal Revenue Service (IRS): 10 Facts about Capital Gains and Losses
- Los Angeles Times: Selling at the Bottom Offers Tax Advantages
- New York Times: First an Awful Year for Mutual Funds. Now, the Tax Bill.
- Bloomberg Business Week: Mutual Funds –- Big Losers Can be Big Tax Shelters
- CNN Money: Cut your Taxes in Retirement
- Are Individual Stock Market Gains Taxable?
- Do You Have to Amend a Return if You Are Not Otherwise Required to File to Capital Loss Carryover?
- What Is an Asset Sale?
- The Definition of Realized Gain and Loss
- Are Worthless Stocks Tax-Deductible?
- How to Change a Dividend Reinvestment
- How to Roll a Capital Gain Into a Roth
- Are There Penalties for Selling Stock Within One Year?