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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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43 Responses to “Deducting Capital Losses of Stock”

  1. bob says:

    i purchase stock on 2010 and i never sold it. on December 2011 the stock went reverse split to 1 to 300. i still have few dollar left…. do i have to report my losses even though i did not sell any yet.

    • Jim says:

      You haven’t lost anything yet, a reverse split means the price might be lower but you still own the same amount in terms of total dollar value. The stock price might have fallen since then though, but you don’t get to claim losses until you sell.

      • Timothy says:

        What if the stock experiences a series of reverse splits completely wiping out all shares that you once owned? An initial split left me with 435,000 shares. After the 2nd RS I was left with 435 shares, but after a 3rd 1:1000 split, a single fractional share was all that remained, which Etrade effectively labeled as ZERO. How would that look on a Schedule D?

        • Jim says:

          On that last split, the company would’ve paid you out cash for the fractional shares, I’d ask ETrade about it.

          • Timothy says:

            As a result of the 3rd RS, the value of the share was still less than a penny, so no cash was paid out. Looking into it further, according to publications on the IRS website, the word WORTHLESS can be placed in the column that would normally contain the Sales price. I will confirm with my accountant if that is acceptable.

  2. Wen says:

    Hi I had some 10K capital loss 2010 but I didn’t report them in my 2010 tax return.
    Now I am filing my 2011 tax return, and I want to use the capital loss from 2010 to reduce my taxable income.
    Unfortunately, I didn’t have the carry over from 2010 D schedule, because I didn’t report my capital loss 2010.
    In this situation, do you know how could I use my 2010 loss to reduce my income of 2011 even though I didn’t file out schedule D of 2010?
    Thanks very much!

  3. Erol says:

    Hi.
    I have a loss of $5000 in 2006 due to a stock becoming worthless. Two months ago I filed an amended return for 2006 for the maximum $3000 deduction.

    To get the remaining $2000 deduction I filed another amended return for 2007. The IRS sent me a letter stating “you filed your claim for credit or refund more than 3 years after the tax return due date. A claim must be filed within three years from the time the return was filed.” How do I claim the remaining $2000 deduction?


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