All About the Capital Loss Tax Deduction - SmartAsset (2024)

All About the Capital Loss Tax Deduction - SmartAsset (1)

When it comes to investing, you can expect to experience both gains and losses. You might even incur a capital loss on purpose to get rid of an investment that’s making your portfolio look bad. And while selling an asset at a loss may not seem ideal, it can benefit you at tax time. Besides lowering your taxable income, a capital loss may also help you snag a deduction.

A financial advisor can help you optimize a tax strategy to reach your investing goals.Find a financial advisor today.

What Is a Capital Loss?

A capital loss occurs when you sell a capital asset for less than what you bought it for. Capital assets include stocks, bonds, homes and cars. Any expenses from the sale of an asset count toward the loss amount. Youmay be able to claim a capital loss on an inherited property, too, if you sold it to someone who’s not related to you and neither you nor your family members used it for personal purposes.

It’s important to remember that capital losses (also known as realized losses) only count following a sale. So just having a stock decrease in value isn’t considered a capital loss even if you hold on to it. An asset that you keep after its price has fallen is called an unrealized loss.

Realized gains (or profits from the sale of an investment) should always be reported to the IRS using Form 8949 and Schedule D. You’ll also use Schedule D to deduct your capital losses. Realized losses from the sale of personal property, however, do not need to be reported to the federal government and usually aren’t eligible for the capital loss tax deduction.

The Capital Loss Tax Deduction

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The capital loss deduction gives you a tax break for claiming your realized losses. In other words, reporting your losses to the IRS can shrink your tax bill.

How much you candeduct depends on the size of yourgains and losses. If you end up with a larger capital gain amount, you can subtract your losses from your gains.This lowers the amount of income that’s subject to the capital gains tax.

What happens if your losses exceed your gains? The IRS will let you deduct up to $3,000 of capital losses (or up to $1,500 if you and your spouse are filing separate tax returns). If you have any leftover losses, you can carry the amount forward and claim it on a future tax return.

Short-Term and Long-Term Capital Losses

Capital gains and losses fall into two categories: long-term gains and losses and short-term gains and losses. If you sell an investment you owned for a year or less, it’s considered a short-term gain (or loss). If you sell an asset you’ve held for over a year, it counts as a long-term loss or gain.

These classifications come into play when calculating net capital gain. In order to use your losses to offset your gains, you must first group them together by type.Short-term losses must initially be deducted from short-term gains before you can apply them to long-term gains (and vice versa).

Short-term capital gains are taxed like ordinary income. That means your tax rate might be as high as 37%. And depending on your income, you might also owe a 3.8% Medicare surtax.

Tax rates for long-term capital gains, on the other hand, are generally much lower. If you’re in the 10% or 15% tax bracket, you won’t owe any taxes if you have long-term capital gains. If you’re in a higher tax bracket, you’ll face a 15% or 20% tax rate.

You may want to consider selling your assets at a loss when you have short-term capital gains (or no gains at all). That way, you’ll minimize your tax bite and eliminate low-performing investments at the same time.

The Wash-Sale Rule

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If you’re a savvy investor, you may be tempted to take advantage of tax loopholes. Some think they can sell a deflated stock and then immediately buy back the same stock or a similar security. That way, they can deduct a capital loss on their tax return while their portfolio remains relatively unchanged.

That may seem like a good plan. But if you put it into practice, you’ll be breaking the wash-sale rule. This rule says that if you sell a security at a loss, you can’t buy it back (or buy a stock that’s nearly identical to the one you sold) within the 30-day period before or after the sale. If you break the rule and get caught, you’ll have to add the loss to the cost of the new stock you purchased.

To work around the wash-sale rule, you can sell shares of one company’s security and pick up the same type of fund from a different company. To avoid the wash-sale rule in bond trading, it’s best to make sure your new bond differs from the original bond in at least two ways. For example, your new bond may need to have a different rate, maturity or issuer.

Bottom Line

Selling an asset at a loss isn’t the worst thing in the world. In fact, some investors deliberately incur capital losses to lessen their capital gains tax bite. If you’re trying to use a capital loss to offset your gains, just remember to follow the rules so that you can qualify for a tax break.

Tips for Investing

  • Investing isn’t an exact science, and you’re likely to incur losses at some point along the line. A financial advisor can help you manage your investments.Finding a financial advisor doesn’t have to be hard. SmartAsset’s free toolmatches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset has lots of free online investment resources available for you to take advantage of. For example, check out our investment calculator and get started investing today.
  • While you research your options, you could always stash the cash in aninterest-yielding savings account. You’ll earn interest while deciding if you want to find a longer-term investment. And the best part is you can withdraw the money at any time.

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All About the Capital Loss Tax Deduction - SmartAsset (2024)


All About the Capital Loss Tax Deduction - SmartAsset? ›

For individuals, the maximum annual deduction for net capital losses against ordinary income is $3,000 ($1,500 if married and filing separately). If your losses exceed this limit, you can carry forward the remaining losses to future tax years, continuing to offset income until the losses are fully utilized.

How does capital loss tax deduction work? ›

You can use capital losses to offset capital gains during a tax year, allowing you to remove some income from your tax return. You can use a capital loss to offset ordinary income up to $3,000 per year If you don't have capital gains to offset the loss.

Why are capital losses limited to $3,000? ›

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

Can you write off 100% of stock losses? ›

If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.

Can I offset capital losses against income? ›

Losses made from the sale of capital assets are not allowed to be offset against income, other than in very specific circ*mstances (broadly if you have disposed of qualifying trading company shares). You cannot claim a loss made on the disposal of an asset that is exempt from capital gains tax (CGT).

How many years can you carryover capital losses? ›

In general, you can carry capital losses forward indefinitely, either until you use them all up or until they run out. Carryovers of capital losses have no time limit, so you can use them to offset capital gains or as a deduction against ordinary income in subsequent tax years until they are exhausted.

How many years can capital losses be carried forward? ›

If the net amount of all your gains and losses is a loss, you can report the loss on your return. You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.

What is the capital loss rule? ›

You have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis. Losses from the sale of personal-use property, such as your home or car, aren't tax deductible.

What qualifies as a capital loss? ›

A capital loss is the loss incurred when a capital asset, such as an investment or real estate, decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.

Is it worth claiming stock losses on taxes? ›

Those losses that you took in the previous calendar year in your portfolio can now be used to save you some money. When filing your taxes, capital losses can be used to offset capital gains and lower your taxable income. This is the silver lining to be found in selling a losing investment.

What is a worthless stock deduction? ›

If you own securities, including stocks, and they become totally worthless, you have a capital loss but not a deduction for bad debt. Worthless securities also include securities that you abandon.

What is the difference between ordinary loss and capital loss? ›

An ordinary loss is fully deductible to offset income thereby reducing the tax owed by a taxpayer. Capital losses occur when capital assets are sold for less than their cost. Taxpayers are allowed to deduct up to a certain limit for capital losses, whereas there is no limit for ordinary losses.

Do capital losses cancel capital gains? ›

Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.

Do I pay taxes on capital losses? ›

Capital losses can be used as deductions on the investor's tax return, just as capital gains must be reported as income. Unlike capital gains, capital losses can be divided into three categories: Realized losses occur on the actual sale of the asset or investment. Unrealized losses are not reported.

Can you skip a year capital loss carryover? ›

However, U.S. tax code generally does not allow you to skip a year for using capital loss carryovers. You are usually required to use them in the next tax year, offsetting capital gains first before applying any remaining amounts to reduce up to $3,000 of other kinds of income.

How much do capital losses reduce taxes? ›

The IRS will let you deduct up to $3,000 of capital losses (or up to $1,500 if you and your spouse are filing separate tax returns). If you have any leftover losses, you can carry the amount forward and claim it on a future tax return.

How can I deduct more than 3,000 capital losses? ›

Limit on the deduction and carryover of losses

If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in Publication 550 or in the Instructions for Schedule D (Form 1040)PDF to figure the amount you can carry forward.

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