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.
Step 1
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.
Step 2
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.
Step 3
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.
