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Deducting Capital Losses of Stock
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Yesterday I wrote about the wash rule and donating stock, today I want to briefly discuss what you do in the case where you losses exceed your gains. You typically use Schedule D to record your capital gains and losses and in the event of a net loss, you are permitted to deduct up to $3,000 of that loss from your ordinary income this year. If you have losses in excess of $3,000, you can carry those forward based on a very straight forward schedule outlined in Publication 550.
If you take the time to read 550, it’s very long, you will quickly learn that treating the losses is actually quite simple. First, any amount in excess of the annual $3,000 limit can be pushed to the next year indefinitely and treated as though the loss were incurred that year. Second, the status of the loss will carry forward. A long term capital loss that is carried to the next year will be treated as a long term capital loss, this means it will be used to reduce long term capital gains before short term capital gains and before ordinary income. There are additional rules and conditions in the event the loss is greater than your ordinary income but you’ll have to use the worksheet to figure that all out.
In the event the stock becomes worthless, it’s treated slightly differently but not much differently. First, they treat it as though you sold the stock in the very last day of the year (this is used to figure whether it’s a short or long term capital loss). On Schedule D you have to mark the stock as worthless and keep records for at least 7 years. More on this in a FAQ answer on the IRS website.
So, if you made some bad decisions and the net effect was a drop in your assets, you can reduce your income by up to $3,000 and push the remainder to next year. Hopefully things work out better next year!
(Despite putting stock in the title, I believe these rules apply for any loss of a capital asset. Warning, your home and your car are not considered capital assets, they are considered personal-use assets by the IRS according to their website)
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You say that “A long term capital loss that is carried to the next year will be treated as a long term capital loss….” What happens to short term capital losses? Can they be used to offset capital gains in the year they are sold? Can they be carried over to the next year? I haven’t been able to find this information on the IRS site. Does anyone know?
Sorry for not being clearer, short term capital gains are passed along and treated as short term capital gains in the next year as well. This is important because long term capital losses will offset long term capital gains first, then short term capital gains.
The answer to your second question is yes, they offset gains in the year they are sold.
I do not get it. You said: “…because long term capital losses will offset long term capital gains first, then short term capital gains”
If this is correct, it would mean that, if there are no long term capital gains, the long term capital losses can be used to offset short term capital gains. Is that what you meant to say?
Here’s a tip my millionaire mentor showed me. If you have a good stock you want to keep but has been doing bad this year you: sell your losing stock, take the tax deduction and immediately buy an index fund in the same industry as the stock then wait 31 days and then sell your index fund and buy back the stock. He’s been doing this for years on stocks he trades covered calls on.
Is it possible to take a capital gain loss of $3,000 and also deduct interest from my margin account? I understand the limit of the insterest deduction is the short term capital gains so I’m wondering if I can do both. I have enough long term capital losses this year to end up with a net loss (Long term losess minus short term gains) of $3,000. can I still deduct the interests?
Can I put ny losses from my 401k on my taxes.
I’m afraid you can’t.
I haven’t funded my Roth yet this year, and I was just thinking that if I sold some of my quality stock that is down like everything else, and then moved the money to my Roth, wouldn’t that mean I’d get the loss plus when the stock goes back up I wouldn’t have gains (since Roth is post tax)? Would I still have to wait the 31 days to buy the stock back?
@ James
Unfortunately, you still have to wait. Many people used to do this arguing that the “IRA” was a separate entity. Then IRS issued Rev. Rul. 2008-5 that states you cannot do this. Some people still try since techincally the IRS won’t have a record of the purchase (until you get audited). Proceed at your own risk, but remember that big brother is always watching.
So what if all I have is a short term capital loss?
I lost 35K last year. I deducted 3K and carried forward 32K. This year I made profits of 40K. So, this year my taxable capital gain would be 37K (by just reducing 3K) or 8K (reducing by entire 32K brought forward)?
I believe it would be $8,000, reducing it by the entire $32,000 loss from last year. Check with a tax accountant to be certain.
I’m afraid I didn’t write-off my stock losses the right way from several years ago. I’ve just been writing off a few at time each year. I still have several thousands in losses that occurred from 98-01. Is there a way to still write them off? Can I go ahead and include them all now even though they were bought and sold several years ago? Or, do I need to go back and amend the past years?
You will likely have to amend previous years, I would talk to an experience tax accountant to have that done properly.
I have recently been laid off, and was wondering I have a small amount in that companies 401k, and last year I posted a loss of 3k on Long Term Stock. Can I, this year, cash out my 401k and use that 3000.00 loss from last year to suppliment any taxes? just to give you a figure 5k in 401k. If it is possible how much can I expect to get back?
Thanks for providing this information! I have $15K in unrealized long-term losses. Is there an advantage over a) realizing a $3K loss for the next 5 years vs. b) realizing a $15K loss this year and carrying forward $3K for the next 4 years? Thanks.
How do I determine the amount of loss? Do I subtract what I cashed out my stock for from the 52-week high, or from the stock value at the same time in the previous year, or can I go back even further?
When you sale, find the difference you paid for the stock and what you sold it for – that’s the loss (or gain).
When does the sale of the stock (gain or loss) need to be effective by? December 31 of the tax year (e.g., 2009) or April of the following (e.g., 2010)?
It needs to execute before December 31st.
This is quite helpful – thank you!
What if there was a reverse stock split? I purchased the stock at one price, they had a reverse stock split and my 100 shares @ $4 became 2 shares @ $4. I sold the stock for $0.02 (no joke!). Do I take the dollar value of the loss from my original puchase ($400 loss) or do I have to value that loss based on the number of shares I sold (2 shares @ $4 = $8 loss)?
You have to adjust your cost basis to reflect the split, so divide your original purchase price by 50 (on a 50-1 reverse split).
I am selling real estate and will have a long term capital gains Will I be able to deduct the entire amount of loss I incurred on the sale of stocks/mutual funds in 2009 or is it a percentage of that amount?
Back to the reverse split… if I bought 1000 shares at $1 ($1000) and now have 5 shares worth $4 that went up to $5 and I sell, can I claim a $995 loss even though my 1099 now shows a profit?
If your 1099 shows a profit, you have a profit. The forms will reflect the split.
Argh… If I put $1000 in and can only sell for $5 after, how is that a profit? This sucks..
I received a 1099-B with S/Term and L/Term gross proceeds (Box 2) and total loss at the time of sale in 2009. There were zero gains in 2009. The losses are not over $3000. Can I deduct the loss on line 13? Is attachment of the Sched D required? or do I check the box if not required?
I was doing my taxes on Turbo Tax and I was getting a refund of around 500 something dollars. When I had the software take my 1099s (or whatever they are) from Etrade, my amount refunded dwindled to amount owed of about $3700 roughly – I don’t have exact figures.
The situation is that overall I have short term losses in 2009 in the amount of about $3600. Why is that? From what I gathered, Turbo Tax only received this thing called proceeds from Etrade and did not calculate the cost basis. Is this correct?
My concern is that I don’t believe I owe this unGodly amount of taxes from a portfolio that 95% of it were losses – afterall, the money I put into it was already taxed from my income and I didn’t garner a profit.
Needless-to-say, I refrained from filing my taxes until I see a tax professional because I want these losses itemized to the exact cent.
With that said, I wanted to know that once my losses are noted is the amount owed going to decrease? Will I be able to see a return again this year? This is the first year I invested in stocks and all the previous years I received a refund.