How to Claim Stock Losses on Your Taxes

When an investment is sold for less than its purchase price, it results in a capital loss. The tax code allows these losses to lower a taxpayer’s overall tax liability by offsetting other investment gains. In some cases, these losses can also offset a portion of regular income. The process involves specific information, calculations, and forms.

Information Required to Calculate Your Loss

To calculate a stock loss, you will need several pieces of information, which are summarized on Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions.” This form is issued annually by brokerage firms to investors who have sold securities. It provides the key details for your tax calculations.

One piece of information is the stock’s cost basis, its original value for tax purposes. This is the price paid for the shares, including any commissions or purchase fees. The basis can be adjusted by events like stock splits or reinvested dividends, which use payouts to purchase more shares.

Another necessary detail is the sale proceeds, which is the total amount received from selling the stock. Any commissions or fees paid for the sale must be subtracted from the gross proceeds.

The holding period determines if a loss is short-term (held for one year or less) or long-term (held for more than one year). Form 1099-B provides the acquisition and sale dates needed to determine this period. This distinction is important because short-term and long-term losses are treated differently.

Calculating and Categorizing Your Stock Losses

Once you have the necessary information, the next step is to calculate the net capital loss through a process called netting. This procedure ensures that gains and losses are offset in a systematic way.

First, offset short-term capital losses against short-term capital gains to find the net short-term result. Similarly, offset long-term capital losses against long-term capital gains to find the net long-term result.

After these initial calculations, the net figures are combined. If you have a net short-term loss of $5,000 and a net long-term gain of $2,000, the loss offsets the gain, leaving a net short-term capital loss of $3,000. If the situation were reversed, the same offsetting principle would apply.

If both calculations result in losses, such as a $1,000 net short-term loss and a $4,000 net long-term loss, they are combined into a total capital loss of $5,000. This total loss is then subject to deduction limits.

Understanding Special Reporting Rules

Certain rules can affect the ability to claim a stock loss. The wash sale rule prevents taxpayers from claiming a loss on a stock sale if they acquire “substantially identical” stock within a 61-day window. This period includes the 30 days before the sale, the day of the sale, and the 30 days after the sale.

Triggering the wash sale rule results in a deferral, not a permanent loss of the tax benefit. The disallowed loss is added to the cost basis of the newly acquired stock. For example, if you sell a stock for a $1,000 loss and buy the same stock back 15 days later, the $1,000 loss is disallowed and added to the purchase price of the new shares. This reduces the potential gain or increases the loss when the replacement shares are eventually sold.

Another situation involves securities that become completely worthless, for instance, due to a company’s bankruptcy. The loss is treated as if the stock were sold on the last day of the tax year in which it became worthless. This rule is important for determining the holding period, as a stock that became worthless in February is treated as sold on December 31st, potentially changing a short-term loss to a long-term one.

Completing the Necessary Tax Forms

To report stock losses, taxpayers must use specific IRS forms. The primary form for detailing individual transactions is Form 8949, “Sales and Other Dispositions of Capital Assets.” On this form, you must list each stock sale separately, providing the details gathered from your Form 1099-B.

Form 8949 is divided into two parts to separate transactions based on their holding period. Part I is used for short-term transactions, and Part II is for long-term transactions. Within each part, there are checkboxes that align with the information provided by your brokerage.

After listing all sales on Form 8949, the totals are transferred to Schedule D, “Capital Gains and Losses.” Schedule D consolidates the net figures from all your Form 8949s and guides you through the final netting process to arrive at the total net capital gain or loss for the year.

The final figure calculated on Schedule D is then transferred to your main tax return, Form 1040. If there is a net capital loss, it will be used to reduce your overall income, subject to certain limitations.

Applying the Capital Loss Deduction

After calculating the net capital loss on Schedule D, the final step is to apply the deduction. The tax code limits how much of a net capital loss can be deducted against other income, such as wages, in a single year. The annual deduction limit is $3,000 for individuals and those married filing jointly, or $1,500 for those married filing separately.

If your net capital loss for the year is greater than this annual limit, the excess amount is not lost. It can be carried forward to subsequent tax years as a capital loss carryover. This carryover can be used to offset capital gains in future years or to reduce ordinary income, subject to the same annual limit.

The character of the carryover loss is preserved. If the excess loss was short-term, it remains a short-term loss in the following year. Likewise, an excess long-term loss is carried forward as a long-term loss. This is significant for the netting process in future years.