How to Claim Losses From the Stock Market

Research Your Investments Carefully

The recognition of investment losses is straightforward in its application. Proper record keeping makes the separation of financial gains, losses and dividends qualifying for long- and short-term tax an easy task. Records must be retained, usually for 7 years, in case of tax disputes.

Instructions

1. Collect all tax information. Compile a spreadsheet program from the trade summary your brokerage firm must issue you every year. List date of purchase, number of shares purchased, number of shares sold and dividends received. Stocks held 1 year or more are long-term transactions. Trades less than one year are considered short term. Dividends are ordinary income. Net out long and short-term gains and losses. Note if any investment had in the current or prior year a return of capital. Return of capital (also called principal) lowers the original cost of your investment.

2. Use net losses that exceed gains as deductions up to $1,500 for individuals or $3,000 for married couples. Know that short-term gains are gains achieved in less than 1 year. Long-term gains are for investments held more than 1 year. Use IRS Form 1040 D to list and file all investments. The result will be carried onto your Form 1040. Dividends are considered ordinary income.

3. Note that short-term losses should be taken before they become long-term losses to maximize the effect of the loss using ordinary income tax rates. Try to extend short-term gains by hedging if necessary so that they become long-term gains and benefit from the lower capital gains rate.

4. Do not deduct paper losses. These are losses that exist in the investor's assets but have yet to be realized by their actual sale. Only traders in the futures market are required to take all investments as if they were sold on the last day of the year. Futures trading is the legally mandated exception to the rule about paper losses.

5. Understand the definition of worthless assets with respect to privately held investments. For tax purposes, worthless companies must have no future business prospects and financial balance sheet insolvency. Do not assume that a company can be written off for any other reason. If you are uncertain what can be claimed call your tax professional or the Internal Revenue Service.

Tips & Warnings

• Keeping track of the original cost of mutual funds held for several years can be difficult if records are not kept up-to-date after each year's distribution.

• If you sell a security for a loss, you cannot buy the stock again for 30 days and still declare the original loss.

References

• Claiming Worthless Stock

Resources

• IRS Guidelines For Declaring Gains and Losses