Can Stock Market Losses Be a Tax Deduction?
The Internal Revenue Service provides tax benefits to taxpayers who incur losses as a result of trading securities in the stock market. The body of law governing stock transactions is extensive. Taxpayers must become familiar with all requirements of the tax law to ensure the deduction is appropriate and quantitatively accurate.
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Capital Asset
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Stocks are characterized as capital assets. Losses that are attributed to the sale or exchange of a capital asset can be used to offset capital gains and as a deduction from taxable income.
Holding Period
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The Internal Revenue Code requires taxpayers to separate stock losses into long-term and short-term capital losses. Short-term losses are created by the sale or trade of a stock that you hold for a maximum of one year. Long-term losses are created by the sale or trade of stocks that you hold for more than one year. To determine the holding period of an asset, begin counting with the day after you purchased the stock. A taxpayer's holding period continues and includes the day on which the stock is traded or sold.
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Basis
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Taxpayers must determine the tax basis for each stock sold during the tax year. Tax basis includes the purchase price plus all commission charges paid to a brokerage house. If you received the stock as a gift or in exchange for services, the basis of the stock is its fair market value on the date of acquisition.
Calculating Losses
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Taxpayers who incur gains and losses in a tax year are required to complete the Schedule D attachment to IRS Form 1040. The schedule requires that all short-term and long-term capital transactions be reported separately. The pertinent information required includes the dates of purchase and sale, the costs to acquire the stock and the price it was sold at. The schedule arrives at two separate figures. The first provides the net short-term gain or loss for the year, while the second provides the net long-term gain or loss.
Deduction Amount
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All capital losses, regardless of the category, are used first to offset the amount of capital gains in a year. If total losses exceed total gains for the year, the remaining amount can be deducted on the tax return up to $3,000. Total losses in excess of this amount are carried forward to future tax years to offset capital gains or be deducted from income. For example, if at the end of a tax year you have $10,000 in short-term capital losses and $4,000 in long-term capital gains, the $10,000 loss will eliminate the $4,000 of gain. The remaining $6,000 of losses can be deducted from ordinary income in the current year in the amount of $3,000. The remaining $3,000 is carried forward to the successive tax year to be used in the same way.
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