Deducting Stock Losses: A Guide (2024)

It’s never fun to lose money in the stock market, but it can help you out when it's time to file your 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.

The rules for computing capital gains and losses are relatively straightforward. Once you understand the basics, you’ll know when and how to use these strategies to minimize your tax bill.

Key Takeaways

  • Selling an investment for a net price that exceeds the cost paid for it creates a capital gain. Selling it for less creates a capital loss.
  • Capital gains tax is only paid on realized gains after the asset is sold.
  • Long-term capital gains (assets held longer than a year) are taxed at favorable rates. Short-term gains (held less than one year) are taxed as ordinary income, which is often a higher rate.
  • Taxpayers can offset capital gains with capital losses in order to lower their capital gains taxes, with tax-loss harvesting strategies aimed at maximizing this effect.
  • Losses on investments can be carried forward to offset gains in future tax years.

How Capital Gains and Losses Work

The first rule to remember is that you only need to worry about capital gains and losses that you have realized in your retail investment accounts. Gains and losses inside traditional or Roth IRAs or any other type of tax-deferred plan or account are not reportable. You don’t have to report gains or losses on any stocks or other securities until they are sold. Gains on appreciated holdings that you still own are not reportable until you sell them, at which time you realize a gain or loss.

Capital gains and losses are divided into two holding periods. Short-term gains and losses happen when you buy and then sell an investment within a one-year time period, including the day on which you bought it. For example, if you bought a stock on Oct. 25, 2023, then you will realize a short-term capital gain or loss if you sell that stock on Oct. 25, 2024. If you sell the stock more than one year to the day later than you bought it, your gain or loss will be taxed at a lower long-term rate.

Example of Computing Capital Gains and Losses

There is a specific order in which gains and/or losses are computed for tax purposes. If you realize both long and short-term gains and losses in the same year, there is a specific order to follow to compute your net gain or loss.

  • $10,000 short-term capital gain from the sale of stock
  • $12,000 short-term loss from the sale of stock
  • $15,000 long-term capital gain from the sale of a publicly-traded exchange-traded fund (ETF)
  • $5,000 long-term capital loss from the sale of publicly-traded real estate investment trust (REIT)

First, each type of capital gain is offset by the same type of capital loss. So the $10,000 short-term gain is netted against the $12,000 short-term loss. This leaves you with a net short-term loss of $2,000. Your long-term loss is then netted against your long-term gain to give you a net long-term gain of $10,000.

Second, remaining losses can be used to offset remaining gains. Your net short-term loss is now netted against your net long-term gain to give you a final net $8,000 long-term capital gain.

This number is the amount that you will put on line 15 of your Schedule D when you fill out your tax forms.

Tax Loss Harvesting

Knowing how to net your gains and losses is only the first step toward being a tax-efficient investor. If November comes and you’re holding some securities in your retail account that have dropped in value since their purchase, you can take the opportunity to realize some capital losses that you can net against your gains or other ordinary income.

This is easily accomplished by selling the losing holdings and then buying them back. The only stipulation here is the wash sale rule that is imposed by the Internal Revenue Service (IRS) on this type of buyback strategy. This rule says that investors have to allow at least 30 calendar days to elapse before they can buy back what they sold or a substantially identical asset or the loss will be disallowed.

The 30-day waiting period also means that you cannot buy the asset back any later than the last business day in December when the markets are open if you want to realize your loss for that year.

Strategy for the Wash Sale Rule

The IRS doesn’t want to make it too easy for people to realize capital losses. If investors could sell an asset and then buy it back immediately, everyone could do it every single time their holdings dip under the purchase value. That would be millions of additional transactions and an untold fortune in realized losses that could be netted against gains and other income.

The 30-day wait imposed by the wash sale rule introduces an element of market risk that makes an investor think twice before trying this strategy. If the stock or other security rises substantially in price after it is sold, the investor will miss out on the gain.

Therefore, this strategy is generally only appropriate if the current value of the holding is considerably lower than the purchase price and is not likely to rise in value during the waiting period.

The wash sale rule can be legally circumvented by buying back a different stock or security than the one that was sold. This eliminates the waiting period because that rule mandates that it only applies to the sale and repurchase of “substantially identical” holdings.

Buying back something else may be a good idea anyway. If you bought a stock primarily because you're bullish about its sector, and it turns out to be a loser, you may be wise to ditch that holding and buy a better performer in the sector or an ETF that invests in the sector.

For example, if you buy stock in a pharmaceutical company and it drops in price for a company-specific reason, you could dump the stock late in the year and use the proceeds to buy an ETF that holds all of the stocks in one of the pharmaceutical or healthcare indices.

This way you have not only gained a tax break, but you've also diversified your portfolio.

Tax Loss Carryovers

If your net losses in your taxable investment accounts exceed your net gains for the year, you will have no reportable income from your security sales. You may then write off up to $3,000 worth of net losses against other forms of income such as wages or taxable dividends and interest for the year.

Any net realized loss in excess of this amount must be carried over to the following year.

If you have a large net loss, such as $20,000, then it would take you seven years to deduct it all against other forms of income (a $3,000 loss every year for 6 years and a $2,000 loss in the seventh year).

However, if you were to realize an $8,000 gain three years after you realized your loss, then you would be able to write off that amount of loss against this gain, leaving you with no taxable income for that gain for that year.

  • In 2020: capital loss of $20,000, no gains, must deduct against ordinary income
  • In 2021: $3,000 loss
  • In 2022: $3,000 loss
  • In 2023: $8,000 gain

The $8,000 of the remaining undeclared loss can be netted against this gain for the year, bringing the total amount of declared losses to $17,000. The remaining $3,000 can be deducted against gains or ordinary income on the 2023 return.

What Forms Do I Need to Deduct My Stock Losses?

To deduct stock losses, you'll need two additional tax forms: Form 8949 and Schedule D.

These are used to report both gains and losses.

Can I Deduct Losses Only for Stocks?

You can deduct losses on the sale of anything the IRS considers an asset. That includes stock, land, or works of art, among other types of investments.

How Do I Keep Track of My Capital Gains and Losses?

In the lead-up to tax time, keep an eye out for a Form 1099-B or Form 1099-S from your broker, bank, and any other financial firm with which you do business. You should receive the forms in the mail and also have access to downloadable versions on your online accounts.

These forms contain the information you need to report on your total gains and losses.

The Bottom Line

Sophisticated investors who know the rules can turn their losing investment picks into tax savings. By making careful use of capital losses to offset capital gains, you can lower your tax bill over the course of several years. You can also strengthen and diversify your investment portfolio in the process.

For more information on how you can deduct losses from stocks, read the instructions for Schedule D on the IRS website or consult your financial advisor.

Deducting Stock Losses: A Guide (2024)


Can you write off 100% of stock losses? ›

The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately). Any unused capital losses are rolled over to future years. If you exceed the $3,000 threshold for a given year, don't worry.

How can I deduct more than 3000 capital losses? ›

Capital losses that exceed capital gains in a year may be used to offset capital gains or as a deduction against ordinary income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.

Do I have to report all stock losses? ›

If you experienced capital gains or losses, you must report them using Form 8949 when you file taxes. Selling an asset, even at a loss, has crucial tax implications, so the IRS requires you to report it. You'll receive information about your investments from your broker or bank on Forms 1099-B or 1099-S.

Can I write off worthless stock? ›

Bottom line. If you have a worthless asset, you can claim your tax write-off and reduce your taxable income. But it's important that you follow the IRS procedures, because your brokerage may not report your loss on worthless securities that remain in your account if you can't dispose of them.

What is the maximum write off for stock loss? ›

You can then deduct $3,000 of your losses against your income each year, although the limit is $1,500 if you're married and filing separate tax returns. If your capital losses are even greater than the $3,000 limit, you can claim the additional losses in the future.

What is the maximum loss deduction for stock? ›

The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately). Any unused capital losses are rolled over to future years.

What is the $3000 loss rule? ›

The IRS allows investors to deduct up to $3,000 in capital losses per year. The $3,000 loss limit is the amount that can be offset against ordinary income.

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.

Do stock losses offset income? ›

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.

Can you deduct stock losses if you don't itemize? ›

“The simple answer to your question is yes, you can deduct capital losses even if you take the standard deduction.”

How much stock loss can you write off married filing jointly? ›

So can you write off stock losses? You can, but only up to a set limit. The IRS allows you to deduct up to $3,000 in losses if you're filing as a single individual or filing jointly. If you're married but filing jointly, you can deduct $1,500.

What happens if I don't report stock losses on taxes? ›

If you don't report a loss on the sale of a Stock, the IRS will assume the proceeds from said sale to be all profit - assess tax on a false gain.

What is the 165 g worthless stock deduction? ›

If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset.

How do I claim loss on worthless stock? ›

Report worthless securities on Part I or Part II of Form 8949, and use the appropriate code (see the Instructions for Form 8949) for worthless security deduction in the applicable column of Form 8949.

Can I use more than $3000 capital loss carryover? ›

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.

Why are capital losses limited to $3000? ›

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

How much can stock losses offset income? ›

Capital losses can indeed offset ordinary income, providing a potential tax advantage for investors. The Internal Revenue Service (IRS) allows investors to use capital losses to offset up to $3,000 in ordinary income per year.

Can I offset a loss on shares against income tax? ›

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).

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