How to Deduct a Stock Market Loss

You can reduce the pain of losses in the stock market by deducting those losses on your taxes. The losses must be realized, meaning you must have sold the stock. You can deduct up to $3,000 of losses annually to reduce your tax liability. Losses beyond that can be carried over indefinitely for deduction in future years.

Instructions

1. Calculate cost basis. This is the price paid for the stock, including fees and commissions. The calculation can be somewhat more complex if you purchased shares of a single company on more than one occasion. If so, you can either use a first-in first-out method for cost basis, or match particular sales to particular purchases.

2. Segregate long-term and short-term losses. A short-term capital gain or loss occurs on shares owned for one year or less. If stocks were purchased on more than one occasion, but sold all at once, part of the sale might be a short-term loss while the remainder is a long-term loss.

3. Report the losses. Capital gains and losses are reported on Schedule D of Form 1040. For lines 1 and 8, you will need the name of the company, the date purchased, date sold, sale price, cost basis and net gain or loss. Losses are reported in parentheses.

4. Complete Part III. The third part of Schedule D takes the short- and long-term loss information provided in the previous section and calculates your loss deduction for the current year. The result entered at line 21 then is entered at line 13 of Form 1040 of your individual tax return.

5. Report carryover losses. If you are claiming capital losses from previous years, these are reported on lines 7 and 14 of Schedule D, depending on whether they were short-term or long-term losses.

References

• IRS: Reporting Capital Gains
• IRS: Instructions for Schedule D
• U.S. News and World Report: Market losses can turn into benefits on your tax return by offsetting gains and other income

Resources

• IRS: Schedule D
• Fairmark: Capital Gains and Losses 101