Tax Implications of Capital Losses from Stock Investments - dummies

Tax Implications of Capital Losses from Stock Investments

By Paul Mladjenovic

Ever think that having the value of your stock investments fall could be a good thing? Perhaps the only real positive regarding losses in your portfolio is that they can reduce your taxes. A capital loss means that you lost money on your investments.

This amount is generally deductible on your tax return, and you can claim a loss on either long-term or short-term stock holdings. This loss can go against your other income and lower your overall tax.

Say you bought Worth Zilch Co. stock for a total purchase price of $3,500 and sold it later at a sale price of $800. Your tax-deductible capital loss is $2,700.

The one string attached to deducting investment losses on your tax return is that the most you can report in a single year is $3,000. On the bright side, though, any excess loss isn’t really lost — you can carry it forward to the next year.

Before you can deduct losses, they must first be used to offset any capital gains. If you realize long-term capital gains of $7,000 in Stock A and long-term capital losses of $6,000 in Stock B, then you have a net long-term capital gain of $1,000 ($7,000 gain less the offset of $6,000 loss).

Whenever possible, see whether losses in your portfolio can be realized to offset any capital gains to reduce potential tax. IRS Publication 550 includes information for investors on capital gains and losses.

Here’s your optimum strategy: Where possible, keep losses on a short-term basis and push your gains into long-term capital gains status. If a transaction can’t be tax free, at the very least try to defer the tax to keep your money working for you.