Do I Need to File a 1099-B If I Lost Money on Investments?
Learn when you need to file a 1099-B, even if you lost money on investments, and how accurate reporting of sales and losses impacts your tax obligations.
Tax season can be confusing, especially when reporting investment activity. If you sold stocks, bonds, or other securities at a loss, you might wonder whether filing a 1099-B is necessary. Many assume only profitable trades need reporting, but the IRS requires documentation for all sales, regardless of gains or losses.
Understanding how this form impacts your tax return helps ensure compliance and maximize deductions.
Significance of 1099-B in Reporting Sales
Brokerage firms issue Form 1099-B to investors who sell securities, summarizing each transaction, including the sale date, proceeds, and, if available, cost basis. The IRS uses this to verify accurate reporting. Since brokers send a copy to the IRS, discrepancies can trigger audits or tax assessments.
The form categorizes transactions as short-term or long-term, affecting tax rates. Short-term sales—assets held for one year or less—are taxed at ordinary income rates, which can be as high as 37% in 2024. Long-term sales, for assets held more than a year, qualify for lower capital gains tax rates, ranging from 0% to 20% depending on income.
It also indicates whether the cost basis was reported to the IRS. If provided by the broker, the IRS can verify the gain or loss. Otherwise, taxpayers must use their own records, which is crucial for older investments or those transferred between accounts.
Requirements for Filing the Form
The IRS requires reporting all investment sales, regardless of profit or loss. Failing to include a 1099-B can lead to penalties or an increased audit risk. Even if no tax is owed, omitting reported transactions can prompt IRS scrutiny.
Brokers issue a 1099-B for sales in taxable brokerage accounts. This does not apply to tax-advantaged accounts like traditional or Roth IRAs, where gains and losses are not immediately taxable. However, all taxable accounts—including individual, joint, and trust accounts—must report sales.
If a taxpayer receives a 1099-B, they must include it on their tax return. Since the IRS already has this data, failing to report a sale may result in a notice requesting an explanation or additional tax payments. Even if a 1099-B is not received due to an administrative error, taxpayers must still report all sales based on their records.
Capital Losses and Filing Necessity
Selling investments at a loss can still affect taxes. A capital loss—when a security sells for less than its purchase price—can offset capital gains, reducing taxable income. If total losses exceed gains in a year, up to $3,000 ($1,500 for married individuals filing separately) can be deducted from ordinary income, with remaining losses carried forward indefinitely.
Even if an investor has only losses and no gains, reporting these transactions is required. The IRS mandates documenting all investment sales on Schedule D of Form 1040 and, if applicable, Form 8949. These forms detail each transaction, including the sale date, proceeds, and loss amount. Failing to report losses can lead to missed deductions and discrepancies with IRS records, especially if a brokerage has already submitted a 1099-B.
Accurate Cost Basis Calculation
Calculating the correct cost basis is essential for accurate tax reporting. The cost basis is the original purchase price of a security, adjusted for stock splits, reinvested dividends, and corporate actions. Incorrect calculations can overstate gains or understate losses, increasing tax liability or triggering IRS scrutiny.
Different accounting methods affect taxable outcomes. The most common is First-In, First-Out (FIFO), where the oldest shares are sold first. This can result in higher taxable gains in rising markets. Alternatively, Specific Identification lets investors choose which shares to sell, offering more control over tax outcomes. The Average Cost method, used mainly for mutual funds, averages the total cost of all shares to determine the basis per unit.
Recordkeeping Essentials
Keeping thorough records ensures accurate tax reporting and financial planning. The IRS recommends retaining documentation for at least three years after filing, though longer retention may help with carryover losses or inherited assets. Proper recordkeeping substantiates reported gains or losses if questioned by the IRS and helps prevent errors that could lead to penalties.
Essential documents include trade confirmations, brokerage statements, and records of corporate actions that affect cost basis. Investors transferring securities between accounts should keep original purchase records, as brokerages may not always track historical cost basis. Digital storage simplifies retrieval and reduces the risk of losing critical information.
Possible Deductions for Net Losses
When investment losses exceed gains, taxpayers can reduce their tax burden by claiming deductions. The IRS allows individuals to deduct up to $3,000 in net capital losses from ordinary income per year ($1,500 for married individuals filing separately), which can lower taxable income and potentially increase a refund.
Losses beyond the annual deduction limit can be carried forward indefinitely to offset future gains or applied against ordinary income in subsequent years. This carryforward provision benefits investors who experience significant losses in one year but expect gains later. Strategic tax planning, such as timing sales to maximize loss utilization, can help manage tax liability effectively.