If I Lost Money in the Stock Market, Do I Have to Report It?
Understand the tax implications of investment losses. Learn the rules for reporting stock market losses to potentially offset gains and lower your tax liability.
If you lost money in the stock market, you are generally required to report those losses on your tax return. The tax code allows investors to use losses from selling investments to offset investment gains and, in some cases, a portion of their regular income. When an investment is sold for less than its purchase price, the resulting loss can be a valuable tool for tax planning. Failing to report these transactions means you could pay more in taxes than necessary.
Understanding Realized Capital Gains and Losses
Investments like stocks are considered capital assets for tax purposes. A change in an asset’s value becomes a taxable event only when it is sold. An unrealized loss, which is a decrease in value for a stock you still own, has no impact on your current year’s taxes.
A realized loss occurs when you sell a stock for less than its purchase price, and only realized losses can be reported on your tax return. The tax treatment depends on how long you held the investment, which classifies the loss as either short-term or long-term.
A short-term capital loss is from the sale of an asset owned for one year or less. To determine the holding period, you count from the day after you acquired the asset up to and including the sale date.
A long-term capital loss is from selling an asset held for more than one year. This distinction is important because short-term and long-term losses are first netted against gains of the same type.
Information Required to Report Stock Losses
To report stock losses, you need three pieces of information for each transaction: the cost basis, the gross proceeds from the sale, and the purchase and sale dates.
The cost basis is your total acquisition cost, including the purchase price and any commissions. The proceeds are the total amount you received from the sale, minus any transaction fees. The dates are necessary to determine if the loss is short-term or long-term.
Your brokerage firm compiles this information on Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which is sent after the tax year ends. This document reports all your securities sales for the year, listing the proceeds, sale date, and usually the cost basis and purchase date.
You should review Form 1099-B carefully. If any cost basis information is missing or incorrect, you are responsible for determining and reporting the correct basis on your tax return.
Calculating and Reporting Your Net Capital Loss
To calculate your net capital loss, first separate transactions into short-term and long-term categories. Net the losses against gains within each category by subtracting total short-term losses from total short-term gains, and then do the same for your long-term transactions.
After finding these two net figures, you combine them. If one is a loss and the other is a gain, subtract the loss from the gain. If both are losses, add them to find your total net capital loss for the year.
The IRS limits the amount of net capital loss you can deduct against other income, such as wages, to $3,000 per year ($1,500 for those married filing separately). If your net capital loss is greater than this annual limit, the excess is carried over to future tax years to offset future gains or income.
You must report the details of each sale from Form 1099-B on Form 8949, “Sales and Other Dispositions of Capital Assets.” The totals from Form 8949 are then transferred to Schedule D, “Capital Gains and Losses,” where the final net figure is calculated for your Form 1040 tax return.
Key Rules and Limitations on Deducting Losses
The “wash sale rule” can disallow a loss. This rule prevents you from claiming a loss on a security if you purchase a “substantially identical” one within 30 days before or 30 days after the sale, creating a 61-day window.
If you trigger the wash sale rule, the loss is disallowed for the current tax year. The disallowed loss is instead added to the cost basis of the new shares you purchased. This adjustment defers the tax benefit of the loss until you sell the new shares.
Losses on investments held in tax-advantaged retirement accounts, such as a 401(k) or IRA, are not deductible. The tax benefits of these accounts mean that transactions within them do not have immediate tax consequences. Therefore, a loss inside a retirement account cannot be used to offset gains or income outside of it.