Although it's not much of a consolation prize, a rough year in the stock market can mean a good year for your taxes. If you've sold stocks at a loss, you can use those losses to reduce your taxable income, but the Internal Revenue Service limits how much you can write off each year.
You can use an unlimited amount of stock losses to offset other capital gains for the same year. Say you hit a home run with one of your investments and ended up with $50,000 in capital gains when you sold it this year. If you also had $50,000 in losses, you could totally offset those gains and you therefore wouldn't pay taxes on them. However, if you only had only $500 in gains, you'd be limited to using $500 in losses to offset the gains. In other words, you'd have $49,500 in losses left over.
Additional Loss Deduction
On top of offsetting gains, the IRS allows you to take an additional deduction for losses that exceed your gains, but caps the annual deduction at $3,000. If you're married filing separately, each spouse's losses are capped at $1,500. For example, if you're single and had $49,500 in losses after offsetting your gains, you could then claim a $3,000 deduction on your taxable income for the year, leaving you with $46,500 in unclaimed losses. You can claim this $3,000 deduction, by the way, even if you don't itemize your deductions.
Loss Carry Over
Once you've written off your gains and taken the $3,000 deduction on your taxable income, any remaining unclaimed losses are carried over into future tax years, for as many years as it takes to claim them all. For example, suppose you had $46,500 in losses that you couldn't use last year, and a $2,500 gain this year. You can use $2,500 of the carried over losses to offset the gain and $3,000 more as a tax deduction. The remaining $41,000 of carried over losses would be carried over into future years. Eventually, you will be able to claim all those losses, no matter how long it takes.
If you've got stock losses to report, you've got a little more work to do when you file your taxes than just filling in a line. First, you report each stock sale for the year on Form 8949. Then, you calculate your total gains and losses with Schedule D. When it comes to your actual tax return, you have to use Form 1040, not Form 1040A or Form 1040EZ. If you're reporting a loss, make sure you use parenthesis around your loss otherwise the IRS might accidentally interpret it as a gain. For example, if you're claiming a $1,300 loss, enter "(1,300)."
- Creatas/Creatas/Getty Images
- How to Claim a Long Term Realized Loss
- How to Avoid Paying Income Tax on a Large Capital Gain
- The Definition of Realized Gain and Loss
- Can Short-Term Capital Loss Be a Tax Write-Off Against Ordinary Gains?
- How Long Do You Have to Wait Before Selling Stock?
- IRS Rules for Taxes on Long-Term Capital Gains
- How do I Determine Taxes on Stocks?
- Tax Benefits for Losses on Property Sales