When the market drops, many people look to save money wherever they can, including on taxes. The Internal Revenue Service allows you to take a deduction for the amount that your investment losses exceed your capital gains. The deduction is included as part of your income, so you don't have to itemize your deductions or give up the standard deduction to claim the loss. To claim a loss on your investments on your tax return, you must file your taxes using Form 1040.
Things You'll Need
- IRS Form 1040
- IRS Schedule D
Determine your total capital gains for the year. Capital gains are your profits on any stocks that you sold after holding them for more than one year. If you did not sell any stocks at a profit, you have no capital gains.
Determine the amount of losses you had from stocks sold during the year. The size of the loss is measured by the price you paid for the stock, not the price at the beginning of the year or the stock's highest price. For example, if you bought a stock in 2006 for $12,000 and sold it in 2009 for $3,000, your loss would be $9,000 regardless of how high the price went up or what the stock was worth at the start of 2009.
Subtract your losses from Step 2 from the gains in Step 1. If the result is less than zero, you can take a deduction for your investment losses. For example, if you had no capital gains and $9,000 in losses, you would be eligible to claim a deduction.
Complete IRS Schedule D (see Resources) to document your gains and losses. The amount of your deduction will be listed on Line 21. The IRS limits the deduction to $3,000 per year, unless you file your taxes as married filing separately, in which case the limit equals $1,500.
Claim your deduction by writing the amount of your loss on Line 13 of your Form 1040 tax return.