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)

{ 43 comments, please add your thoughts now! }

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43 Responses to “Deducting Capital Losses of Stock”

  1. NewGirl says:

    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?

  2. jim says:

    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.

    • byblos says:

      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?

  3. Travis says:

    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.

  4. Fern says:

    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?

  5. lonnie says:

    Can I put ny losses from my 401k on my taxes.

  6. James says:

    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?

  7. Jeff Rose says:

    @ 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.

  8. ccreigo says:

    So what if all I have is a short term capital loss?

  9. Sunny says:

    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)?

    • Jim says:

      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.

  10. Suzanne says:

    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?

    • Jim says:

      You will likely have to amend previous years, I would talk to an experience tax accountant to have that done properly.

  11. Scott says:

    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?

  12. John says:

    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.

  13. Janna says:

    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?

    • Jim says:

      When you sale, find the difference you paid for the stock and what you sold it for – that’s the loss (or gain).

  14. George says:

    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)?

  15. Leah says:

    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)?

    • Jim says:

      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).

      • David says:

        I believe that this information is incorrect. While the price per share must be adjusted (in case of a sale of less than all of the shares after the split, whether forward or reverse), the cost basis remains what was originally paid for the original shares purchased. In this example, the cost basis would remain the original purchase price of $400 (100 shares @ $4/share). The cost basis per share has changed from $4.00/share to $200.00/share. This, however is irrelevan when, as here, all of the shares are sold in a single transaction and the loss would be $399.98 ($400 cost basis less the $0.02 proceeds of sale).

  16. Carol says:

    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?

  17. Jay says:

    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?

  18. Jay says:

    Argh… If I put $1000 in and can only sell for $5 after, how is that a profit? This sucks..

    • Eric says:

      In your example, your 1099 would not show a profit, it would show a $975 loss. (5 X 5 – 1 * 1000) = -975.

  19. Lulu says:

    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?

  20. Kris says:

    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.

  21. Jesse says:

    Question: Worked for Citigroup, had mostly common stock where I had a huge loss (obviously. Wondering if I could use the Long term loss of $3000.00 considering I finally just cashed it out after cutting ties with the company? According to my calculations, I have lost nearly $30,000.00 in commom stock. Unfamiliar with taxes and I will consult with my own advisor but just curious.


  22. thunderthighs says:

    Thank you for highlighting capital gains/losses…I’ve been into stocks for a few years but this is still an area where I feel lost!

  23. Monica says:

    I couldn’t find the buy transaction statement and it was not on file with the brokerage. I low balled the estimate of loss (400) but now have found my statement. Could I claim the remaining 2000 on next years taxes or do I have to do an amendment? Thanks.

  24. Bo says:

    If I want to carry over a stock transaction that yielded a loss in 2010, do I need to enter that stock transaction in Schedule D of 2010 return? Or can I wait until I file 2011 to file it?

  25. Tam says:

    Question is, can you carryover all of your long term losses to future years when taxes are higher and the 20% LT cap gain limit goes away? I’d rather pay the 20% on gain now if I think that cap gains tax may go up to 25% or higher. I could save my losses for later.

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