Declaring a Loss on Mutual Funds
If you have lost money on a mutual fund investment, Internal Revenue Service tax rules allow you to declare the loss as a capital loss and use the loss as a tax deduction. Capital losses are first used to reduce any capital gains you have to declare. If you have excess losses or no capital gains, a loss from the sale of mutual funds can be used to lower your taxable income.
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Actual Loss
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For tax purposes, a loss is not a loss until the investment is sold. If your mutual fund shares have dropped in value and you have not sold the shares, there is no loss to claim on taxes. To claim a loss on your tax return, the fund shares must have been sold before the end of the year -- Dec. 31. If you sold the shares and again invested in the fund within 60 days of the sale, the loss will not be allowed for tax purposes. You must sell the fund shares and they must stay sold for at least 60 days.
Capital Loss
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The amount of loss you have from the sale of your mutual fund shares is your cost basis in the fund minus the amount you received when the shares were sold. The cost basis is all of the investment amounts you have made in the fund plus the value of any reinvested capital gains and dividends. Reinvestment increases the cost basis, thus increasing the size of the capital loss. The end-of-year statement for each year you have owned the mutual fund will show the dollar values of all investments and reinvested distributions.
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Short- and Long-Term Losses
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You must divide the loss on the mutual fund into short- and long-term capital losses. Short-term losses are from shares you owned for one year or less. Long-term losses are from shares owned longer than a year. Determine how many of your sold mutual fund shares fit into each category. The basis for the two loss types can be calculated using an average per share basis, calculated from your total basis in the fund, or you can add up the share purchase values for the separate long- and short-term categories.
Using the Loss Write-Off
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The capital loss is claimed on your taxes using IRS Schedule D, Capital Gains and Losses. On the form you will list your mutual fund losses in the appropriate areas for short- and long-term gains or losses. Any other gains or losses you have from investments will also be listed on this form. Tax rules require capital losses to be first used against the same type of gains -- long or short term -- then remaining losses offset the other type of gains and if losses exceed all capital gains, excess losses can be used to reduce other taxable income. The maximum amount of other income which can be offset by capital losses is $3,000. Unused losses can be carried forward to future years.
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