How do I Claim Investment Loss With IRS Form 1040?

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Form 1040 is the longest personal income tax return form.
Form 1040 is the longest personal income tax return form. (Image: tax forms image by Chad McDermott from Fotolia.com)

The Internal Revenue Service requires taxpayers to include their gains from investments as part of their taxable income. However, if you have a loss on your investments, you can use that to offset your gains and even get a tax deduction. Your investment loss must be realized, meaning that you must have divested yourself of the asset to claim the loss. For example, if your stock value dropped by $2,000 but you did not sell it, you cannot claim the loss.

Complete IRS Schedule D, Part I, to determine whether you have a short-term capital gain or loss. Short-term investment gains and losses refer to assets you have held for one year or less.

Complete IRS Schedule D, Part II, to determine whether you have a long-term capital gain or loss. Long-term investment gains and losses refer to assets you have held for more than one year.

Combine the results from Parts I and II to determine if you have a net investment loss. For example, if you had $1,000 in short-term gains and $3,000 in long-term losses, your net loss would be $2,000.

Report the smaller of your loss or the maximum allowable loss for the year on Line 13 of your Form 1040 tax return. As of 2010, the maximum loss equals $3,000 ($1,500 if you are married but file a separate return. This amount will be used to decrease your taxable income.

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