Do You Have to Report Stock Losses on Taxes?
Reporting stock losses is not mandatory, but it's a valuable strategy for managing your tax liability. Understand the process to do it correctly.
When you sell a stock for less than you paid for it, you incur a capital loss. For tax purposes, a capital loss is only realized when the stock is sold, as a decrease in value while you still own the security does not count.
The Requirement and Benefit of Reporting Losses
To receive any tax benefit from a stock loss, you must report the transaction. Reporting allows you to legally reduce your taxable income. The primary advantage is using these losses to offset capital gains, which are profits from selling other investments. Your losses can cancel out those gains, reducing the tax you owe on your investment income.
If your total losses for the year exceed your total gains, you can deduct the excess loss from other sources of income, such as your salary or wages. This deduction is a main benefit of reporting your stock losses.
Information Needed to Report Stock Transactions
To report stock sales, you need details for each transaction, which are consolidated on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Your brokerage firm is required to send you this form summarizing your annual trading activity. The information on this document includes:
- A description of the stock sold
- The date you originally acquired it and the date you sold it
- The sales proceeds, which is the total amount you received from the sale
- The cost basis, which is the original purchase price of the stock plus any commissions or fees paid during the transaction
The acquisition and sale dates determine if the loss is short-term (held for one year or less) or long-term (held for more than one year).
Calculating and Applying Your Net Capital Loss
Calculating your net capital loss involves netting gains and losses based on their holding period. First, net your short-term capital losses against your short-term capital gains. Then, do the same for your long-term capital losses and long-term capital gains. This results in a net short-term gain or loss and a net long-term gain or loss.
After finding these totals, you net the results against each other. For example, a net short-term loss would be subtracted from a net long-term gain. If the final result is a net capital loss, you can use it to lower your ordinary income.
The maximum amount you can deduct against ordinary income in a single tax year is $3,000 ($1,500 for those married filing separately). Any net capital loss exceeding this annual limit is not lost and becomes a capital loss carryover. You can carry these unused losses forward to future tax years to apply against future capital gains or deduct from ordinary income, subject to the same annual limit.
Understanding the Wash Sale Rule
A limitation on claiming stock losses is the wash sale rule. This rule prevents investors from claiming a loss on a security if they purchase a “substantially identical” one within 30 days before or 30 days after the sale. This creates a 61-day window around the date of the sale that generated the loss.
If a transaction is a wash sale, the IRS disallows the loss for that tax year. The disallowed loss is added to the cost basis of the newly acquired shares. This adjustment defers the tax benefit until the replacement shares are sold. For example, if you sell a stock for a $500 loss and buy it back within the window, you cannot claim the loss, and it is added to the cost basis of the new shares.
How to Report Losses on Your Tax Return
Reporting stock losses on your tax return involves two forms: Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D, Capital Gains and Losses. You start with Form 8949, listing the details of each stock sale from your Form 1099-B. This includes the asset description, acquisition and sale dates, sales price, and cost basis.
Form 8949 is organized to separate short-term transactions from long-term ones. After you list all sales, you will calculate the totals for each category directly on this form. These totals are then transferred to Schedule D.
On Schedule D, you consolidate the short-term and long-term totals from all your Forms 8949. The form guides you through the netting process to arrive at your final net capital gain or loss for the year. This final figure is then reported on your main tax return, Form 1040, where it is used to calculate your total taxable income.