About Stock Trading & Tax Deduction

Stock market losses can offset gains.

Investors don't usually go into the stock market with the anticipation of tax deductions. They buy stocks hoping those stocks will go up, not down, by the time they sell. However, investing is never a sure thing. If losses occur, there is always the benefit of a tax deduction.

Significance

Investors are able to offset gains in a stock market against stock market losses. Short-term gains can be offset by short-term losses. And long-term gains can be offset by long-term losses. After calculating short- and long-term gains and losses, if there is still a loss, the maximum amount that can be used as a tax deduction for that year is $3,000.

Time Frame

If an investor has a particularly bad year and losses exceed $3,000, the remaining amount can be carried forward to the next tax year, and it can be used against stock gains and/or earned income. If a substantial loss occurs in one year, the amount can be carried forward indefinitely to offset gains.

Benefits

A capital loss directly reduces taxable income, and the taxpayer pays less taxes as a result. Although the ultimate goal in the stock market is to make money, tax deductions can soften the impact of stock market losses.

References

• Bankrate: Capital losses can cut your taxes
• MSN Money: Taxes and Deductions