Tax Deduction for Stock Losses

Usually, when people want to reduce their taxable income, they give to charity or contribute to their retirement accounts. However, loses from stock transactions can likewise reduce your taxable income. his effect can be used strategically to reduce your taxes at a time of your choosing.

You Are Only Taxed on Realized Losses

The Internal Revenue Service doesn't care if you portfolio grew or shrank each year you file your taxes. Instead, the IRS takes note when you "realize" those losses or gains when you actually sell your stock. Selling stock is a taxable event, and you report the amount you earned from the sale, as well as the amount you paid for the stock.

Limits on Losses

You are limited to taking a $3,000 deduction per year on stock losses, or $1,500 if you are married filing separately. However, you can deduct the unused portion of the loss in future years. For example, if you lost $30,000 from the sale of a stock, you could deduct $3,000 from you reported income for the next 10 years.

Deducting More Than $3,000 in One Year

If you reported a gain from a stock sale, you can claim more than $3,000 in losses. For example, if you gained $1,500 from the sale of a stock, you can report $4,500 in losses that year to bring the final tally to a $3,000 loss.

Report the Loss During a Good Year

For some years it may be more advantageous to reduce your taxable income then others. For this reason you may choose to wait a year or two before realizing your loss on your taxes. Just delay selling the stock until the timing is most advantageous to you. Of course, if the stock truly fizzles, you will receive a note from your broker that the stock is worthless, and you must take the loss that year.

If you sell a stock that you believe will rebound later to reduce your taxable income, just buy it back right away. You can report the gain in a future year when you sell it again. Hopefully, the year you eventually sell the stock for good, your income is lower and the profit won't affect your taxes as much.

Hire an Accountant

Reporting gains and losses on stocks can get complicated. Unless you are well-versed in the Schedule D, an accountant will pay for herself by taking the guesswork out of the process. The accountant can also advise you as to which tax year it will be most advantageous to realize the loss.

References

• FiLife Discussion on Stock Market Losses
• Boston.com Discussion on Bankruptcies
• IRS Publication on Investment Losses