How To Deduct Stock Losses From Your Taxes Bankrate

Advertiser Disclosure

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence. Our articles, interactive tools, and hypothetical examples contain information to help you conduct research but are not intended to serve as investment advice, and we cannot guarantee that this information is applicable or accurate to your personal circumstances. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.

How We Make Money

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

Editorial disclosure

All reviews are prepared by our staff. Opinions expressed are solely those of the reviewer and have not been reviewed or approved by any advertiser. The information, including any rates, terms and fees associated with financial products, presented in the review is accurate as of the date of publication. Main Menu Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Main Menu Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure

How to deduct stock losses from your taxes

Phillip Rubino/Getty Images

Advertiser Disclosure

How We Make Money

Editorial disclosure

Bankrate Logo

Why you can trust Bankrate

While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation of how we make money. Bankrate Logo

Why you can trust Bankrate

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money. Investing disclosure: The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal. Bankrate Logo

Editorial Integrity

Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

Key Principles

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Editorial Independence

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate Logo

How We Make Money

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Bankrate Logo

Insurance Disclosure

Coverage.com, LLC is a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in . Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way. Whenever the Internal Revenue Service (IRS) is mentioned, it tends to invoke the idea of paying taxes. But the IRS does offer some tax breaks as well, including the ability for investors to deduct stock losses. These losses, called , serve to lower your and reduce your tax liability. Here's how to deduct stock losses from your taxes.

Writing off your losing stock trades How it works

The IRS allows you to deduct from your taxable income a capital loss, for example, from a stock or other investment that has lost money. Here are the ground rules: An investment loss has to be realized. In other words, you need to have sold your stock to claim a deduction. You can't simply write off losses because the stock is worth less than when you bought it. You can deduct your loss against capital gains. Any taxable capital gain – an investment gain – realized in that tax year can be offset with a capital loss. If your losses exceed your gains, you have a net loss. Your net losses offset ordinary income. No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 () or $1,500 (for married filing separately). Any unused capital losses are rolled over to future years. If you exceed the $3,000 threshold for a given year, don't worry. You can claim the loss in future years or use it to offset future gains, and the losses do not expire. You can reduce any amount of taxable capital gains as long as you have gross losses to offset them. For example, if you have a $20,000 loss and a $16,000 gain, you can claim the maximum deduction of $3,000 on this year's taxes, and the remaining $1,000 loss in a future year. Again, for any year the maximum allowed net loss is $3,000. The last day to realize a loss for the current calendar year is the final trading day of the year. That day might be December 31, but it may be earlier, depending on the calendar. You can enter any stock gains and losses on Schedule D of your annual tax return, and the worksheet will help you figure out your net gain or loss. You may want to consult with a tax professional if your situation is complicated. It's also important to know that short-term losses offset short-term gains first, while long-term losses offset long-term gains first. However, once losses in one category exceed the same type, you can then use them to offset gains in the other category. Short-term gains and losses are for assets held less than one year, while long-term gains and losses are for assets held longer than a year. Because short-term gains and long-term gains may be taxed at different rates, you'll need to keep your gains and losses straight as you strategically plan your taxes. In general, than short-term gains. So you may consider taking a loss sooner than you might otherwise, in order to minimize your taxes. Or you might try to use low-tax long-term gains to offset more highly taxed short-term gains. In fact, many investors strategically plan when and how they're going to realize their losses to ensure they minimize their taxable income each year, typically by realizing investment losses near the end of the tax year. , and it can save you real money. However, tax-loss harvesting is not restricted to year-end, and it can be a useful practice during the year. Deducting a loss is valuable only in a taxable account, not special tax-advantaged accounts, such as and , where capital gains aren't taxed.

How to determine your capital losses

Capital gains and losses are divided between long-term and short-term gains and losses. When you have both long-term and short-term gains and losses in a given tax year, there are ordering rules that need to be used in matching and capital losses. Long-term capital gains and losses occur after the security has been held for at least one year. Meanwhile, a short-term gain or loss applies to securities that were sold or disposed of after holding for less than a year. Long-term capital gains and losses should be netted against each other as should short-term gains and losses. For example, you might have realized $500 in profit on one long-term holding, while losing $200 on another, which would result in a net $300 long-term gain for the year. Use the same process to calculate your net on short-term gains. Next, the net long-term gain or loss should be netted against the net short-term gain or loss. Whatever is left after this netting process will be taxed accordingly if the net result is either a long- or short-term capital gain, or deductible as described above if a net capital loss. If possible, your tax-loss harvesting efforts should try to avoid a net short-term capital gain as these gains are taxed at your ordinary income tax rate versus the generally preferable long-term capital gains rates. This will help each year.

Bankrupt companies are an exception to be aware of

If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock - up to annual IRS limits with the ability to carry excess losses forward to future years. The IRS will expect you to have sufficient documentation of your cost basis in the stock to show the amount you lost in this situation. There is no need to actually sell the shares to claim a capital loss.

How much can you save by claiming a stock loss

So how much does claiming a stock loss save you on your taxes? The answer to that question depends on your tax bracket and whether your loss is offsetting a taxable gain or ordinary income: If you're offsetting a taxable gain with a loss, then you're saving the tax on the gains that you would otherwise have paid, and that figure can vary based on whether the gain was long-term or short-term. If you're claiming a net loss, however, it's easier to show how much you can save. . So a $3,000 loss on stocks could save you as much as $1,110 at the high end (37 percent * $3,000) or as little as $300, if you're in the lowest tier. And if you pay state taxes, then you may be able to save another 4 to 6 percent or more on top of these rates. This kind of tax savings is why some people ensure that they're claiming this loss every year.

Limits on the deduction &ndash the wash-sale rule

The IRS does limit your ability to claim a deduction on stock losses, so that you don't game the system. The IRS will not let you write off what's called a . A wash sale occurs when you take a loss on an investment and buy a "substantially identical" investment within 30 days before or after. If you try to claim a wash sale as a deduction, the IRS will reject your deduction. You won't ultimately lose the deduction, but you won't be able to claim it until you stay out of the investment for at least that 30-day period following the loss. When you sell the repurchased stock later, even years later, you can claim the loss. And don't try any fancy footwork to try to dodge the rule. You can't sell the stock and claim the loss, and then have your spouse repurchase the stock within the 30 days. If your partner is buying the stock in that 30-day window, you simply won't be able to claim the loss. Selling an investment in a taxable account and then repurchasing the same investment in a retirement account like an IRA within the wash-sale window will also negate your ability to claim the loss. Note that it's perfectly fine to sell an investment within 30 days and claim a loss. The key element of the wash sale is to repurchase the stock within that window.

Bottom line

Deducting a stock loss from your tax return can be a savvy move to reduce your taxable income, and some investors take great pains to ensure that they're getting the most out of this rule each year. However, you might want to be careful that you're not selling a stock just to get the tax break, if you think it's a good long-term investment. Selling an otherwise good stock at a low point may mean you're selling just as it's about to rebound. - also contributed to an update of this story. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. Written by James Royal Senior investing and wealth management reporter Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. Edited by Managing editor Reviewed by Senior wealth manager, LourdMurray

TREND NOW

How To Deduct Stock Losses From Your Taxes

Advertiser Disclosure

How We Make Money

Editorial disclosure

How to deduct stock losses from your taxes

Advertiser Disclosure

How We Make Money

Editorial disclosure

Share

Why you can trust Bankrate

Why you can trust Bankrate

Editorial Integrity

Key Principles

Editorial Independence

How We Make Money

Insurance Disclosure

Writing off your losing stock trades How it works

How to determine your capital losses

Bankrupt companies are an exception to be aware of

How much can you save by claiming a stock loss

Limits on the deduction &ndash the wash-sale rule

Bottom line

You may also like

Comments (0)

Leave a Comment