How to Claim Stock Losses on Taxes

A stock market downturn can net some good tax deductions.

Stock losses are a reality, especially in a climate of economic instability. The good news is that stock losses are tax-deductible. Claiming your stock losses on your income tax return, however, can be a detailed process. Doing so can reduce your tax liability, but there are rules involved in how much can be claimed in any one tax year. The IRS considers stock losses as capital losses and the form used to report these is the same form used for declaring capital gains or losses on more than just stocks.

Things You'll Need

• Broker statements
• All 1099Bs
• Form 1040
• Schedule D

Instructions

1. Gather all broker statements and 1099B's. If the 1099B's do not contain the original purchase prices or basis for the stocks sold at a loss, you will need to contact the broker to get that information. Most statements will contain the basis but for long-term capital losses it can be difficult to get that information.

2. Read the instructions for the Schedule D form. Enter in each transaction found on the broker statements or in the 1099B's onto the Schedule D. If you have more than four transactions to enter, you will need to use an additional worksheet to calculate the losses. The top half of the Schedule D is for Short Term Capital Gains and Losses, and the lower half is for Long Term Capital Gains and Losses. The IRS defines "short term" as any asset held for one year or less and "long term" as those assets held for more than one year.

3. Begin entering information into the Schedule D form. There are six columns on both the short- and long-term sections. The first column requests a description of the property (here, shares of stock) sold. If these are stocks from individual companies, the description will be "X" Shares of "ABC" stock.

   The second column is for the date acquired. This is the date of purchase which should be recorded on your brokers' statements. The IRS allows the use of the term "various" if these shares were purchased over an extended period of time.

   The third column is for the date the stock is sold. There should be a definite date of sale, the term "various" is not permitted here.

   The fourth column is for the sales price or the amount at which the stock was sold.

   The fifth column is for the cost of the stocks when originally purchased. The amount of the original purchase is subtracted from the amount at which they were sold. If the amount is negative, this is the total loss for this transaction.

   These steps are repeated for the long-term losses and the total is carried over to the Form 1040 line 13.

4. Calculate total deductible losses. If the total of losses is greater than the total of gains, the amount to be transferred to the Form 1040 will be a negative amount. The IRS, however, will only allow losses beyond the gains made of up to $3,000 for those filing married filing jointly ($1,500 for married filing separately). Any loss over $3,000 will be carried forward to later years to reduce the tax liability on future capital gains or ordinary income until the total losses are used up.

References

• IRS.gov - Schedule D Instructions - Capital Gains and Losses
• IRS.gov - Schedule D - Capital Gains and Losses
• IRS.gov - Article - IRS Reminds Taxpayers They Can Use Stock Losses to Reduce Taxes