Not every investment you pick is going to be a winner. Thankfully, Uncle Sam gives you a break for the losers you've picked: You can use them to offset your income from the winners you chose. However, don't go canceling out your gains and losses willy-nilly. The IRS has specific rules on how to figure out the type of gain or loss you have after you've netted everything. Long-term gains and losses are those related to investments you've held for more than one year. Short-term gains and losses come from investments you've held for less than one year.
Subtract your short-term capital losses from your short-term capital gains. You must offset all of your short-term capital losses before you can offset your long-term capital gains. For example, assume you have $12,000 in long-term gains, $5,000 in long-term losses, $4,000 in short-term gains and $6,000 in long-term losses. Offset the $6,000 of short-term capital losses against your $4,000 of short-term capital gains so that you have a net $2,000 short-term loss.
Subtract any long-term capital losses from your long-term capital gains. Use the $5,000 in long-term losses to bring down your long-term capital gains from $12,000 to $7,000.
Offset your net long-term gains with your net short-term losses. In this example, net your $2,000 short-term capital loss with your $7,000 long-term capital gain to find you have a taxable long-term capital gain of $5,000.
- If your net short-term losses exceed your net long-term gains, you can deduct up to $3,000 on your taxes ($1,500 if married filing separately) and carry over the rest to the next year.
- Capital losses on personal property can't be used to offset your any capital gains. For example, if you sell your old car for less than you paid for it, you can't use that loss on your taxes.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."