How to Offset Tax Gains with Selling Bad Stocks
In the United States, the Internal Revenue Code allows individual income taxpayers to use losses from the sale of stocks to offset all other capital gain income. If, after the offset against all other forms of capital gains, the taxpayer has additional amounts of capital loss, up to $3,000 annually of those additional losses may be used to offset all other sources of income or gain.
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Things You'll Need
- IRS Form 1040, U.S. Individual Income Tax Return
- IRS Schedule D, Capital Gains and Losses
Instructions
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Offsetting Income with Capital Losses from Stock
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Sell any stocks where the current fair market value is less than your original cost or other basis in the stock. Losses from the sale of stock cannot be claimed as a deduction for federal income tax purposes unless the loss is realized, meaning that the stock has been sold.
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2
Input the required information for each stock sold on Internal Revenue Service (IRS) Schedule D, Capital Gains and Losses, on IRS Form 1040, U.S. Individual Income Tax Return. The IRS requires you to input a brief description of the stock sold (such as "100 shrs. of ABC Corp."), the date you acquired the stock, the date you sold the stock, the proceeds from the sale of the stock, and your cost or other basis in the stock.
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3
Calculate your loss by subtracting your cost or other basis in the stock from the sales price of the stock. Enter this result in the "gain or (loss)" column of Schedule D.
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Aggregate all short-term capital gains and losses and all long-term capital gains and losses by adding the numbers in the "gain or (loss)" column for each category. This step allows you to offset your capital losses against any capital gains.
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Carry up to $3,000 of any remaining loss after aggregating all capital gains and losses for each category to page 1 of IRS Form 1040 and input the loss in the 'capital gain or (loss)' line of the form. This amount is totaled with all forms of income and reduces both your computation of taxable income and income tax due for the tax year.
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Tips & Warnings
Losses greater than $3,000 are carried forward to the next tax year, where they may first be used to offset any net capital gains and then up to $3,000 may again be used to offset any other forms of income for the tax year.
Repurchasing a stock sold for a loss within 30 days of a loss triggers the IRS' "wash sale" rules. The loss is then disallowed and may not be claimed for federal income tax purposes.
