Although no one likes taking a loss, at tax time you can use your losses to your advantage. Capital losses, such as those you take from losing stock transactions, can be used to offset capital gains and ordinary income up to $3,000. Additional capital losses can be carried forward for use in future years. Business losses can be subtracted from other earned income on a dollar-for-dollar basis. Also, if your business is your only source of income, having a loss can prevent you from paying any income tax at all.
Gather your 1099-B forms. At the end of every tax year, any firm where you have sold a stock will send you a 1099-B, which lists the proceeds of all of your stock sales. However, the 1099 will not list the purchase information for your trades, which you will have to provide from your own records. If you do not have your individual trade confirmations, check your brokerage statements or call your financial adviser for this information. For stock transactions, you should follow the instructions for Schedule D (see Resources). Enter your purchase dates and costs, along with your sale dates and proceeds, and calculate your net gain or loss. Make sure to divide your transactions into long-term, for those held for longer than a year, and short-term, for those held for one year or less.
Assemble all of your business receipts and expenses. To determine the size of your business loss, you should follow the instructions on IRS Schedule C, "Profit or Loss from Business." Generally speaking, you will have to provide your gross business receipts, less your cost of goods sold and expenses to determine your net business gain or loss (see Resources). As business calculations and deductions can prove complex, you may consider using a tax adviser to help you with your Schedule C.
Transfer your loss figures to your tax return. For capital losses, transfer the amount of your loss to line 13 of your Form 1040. For business losses, enter the amount of your loss on line 12 of your 1040 and also on line 2 of Schedule SE, "Self-Employment Tax."
Tips & Warnings
- Although not as common, the IRS also allows deductions for casualty, disaster and theft losses -- subject to certain requirements. Check IRS Tax Topic 551 for specific information relating to these types of losses (see Resources).
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