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Home › Tax Filing › How To Deduct Stock Losses From Your Taxes
How does a capital loss deduction work?
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If you pay 1099 tax and income taxes, you’re looking for every possible way to lower that bill. Apart from claiming tax credits and deductions, did you know that the IRS also lets you claim any stock market losses as a deductible?
Investors can write off capital losses as a tax deduction but only if they are “realized,” which just means they are the result of a share being sold. There are certain rules to follow when writing off stock losses, and we’re here to take you through all of it, including how much stock loss you can actually write off.
Key takeaways:
- Stock losses are tax deductible
- There is a limit on how much capital loss you can deduct in a year
Table of contents
Long-term and short-term capital gains and losses
Like we mentioned earlier, every stock loss you write off when paying your taxes has to be “realized.” So, if you try to claim a loss just because a certain stock’s price has decreased in value, that won’t work.
If we’re using technical jargon, this loss is commonly called a “capital loss.” This type of loss can be short-term or long-term and is incurred when an asset like stocks, real estate, mutual funds or even bonds are sold at a loss. If you incur a loss on an asset that you’ve had for less than a year, that is a short-term capital loss.
The same concept applies to capital gains. Any long-term gain is incurred when an asset sold has been held for over a year. Generally, net profit or loss is calculated by calculating first short-term gain or loss and combining it with the long-term gain or loss.
So, if you have a long-term gain of $500 and a short-term loss of $350, your net profit will be $150 – and you will be taxed on that. If you have no long-term or short-term gains in a year, the net loss can be deducted from your taxes as a tax write off.
Another frequent question investors have when paying taxes on capital loss is “Can long-term loss affect short-term gain?” No, long-term losses can only be used to offset long-term capital gains.
However net losses, be they short-term or long-term, can be used to offset either kind of gain. So, if you have a net loss of $650 and a net short-term gain of $700, you can use it to offset your gain and only be taxed on $50.
Does having a short-term capital loss actually benefit your taxes? Well, it depends on your tax bracket. So, having a net loss in the 37% tax bracket will save you a lot more than it will in the 10% tax bracket.
To save money on your income tax, it is recommended to claim short-term capital losses as deductions as soon as you can since they are taxed at a much lower rate than long-term capital losses. Many investors actually realize their stocks at the end of the calendar year to claim those losses and lower their tax bill through a process called “tax harvesting”.
It’s also a good idea to be aware of the “wash sale” rule when you’re looking to write off any stock losses. This rule was put in place by the IRS to prevent people from cheating the system. If you sell a stock and then buy it back within 30 days, it is considered a “wash sale,” and you will not be able to claim this as a deduction.
How much stock loss can you write off?
So can you write off stock losses? You can, but only up to a set limit. The IRS allows you to deduct up to $3,000 in losses if you’re filing as a single individual or filing jointly. If you’re married but filing jointly, you can deduct $1,500. Anything more than these limits can be carried over and deducted from your taxable income in the next year.
What forms do I need to deduct stock loss?
When you’re filing taxes, you will always use the standard Form 1040 to report your income. If you’re filing as a self-employed individual, you’ll get that income information from Form 1099 and also file Form 1040-ES, if you’re paying quarterly taxes. You can always apply for a tax filing extension which gives you an extra six months to file your return.
To deduct stock losses, you’ll need two forms: Form 8949 and Schedule D. You’ll report your short-term and long-term capital gains and/or losses on Form 8949 and calculate the net profit/loss by adding together the total amount from both categories. You’ll use that net amount on Schedule D to calculate how much tax you owe.
Managing an investment portfolio is a difficult task on its own, but even moreso if you’re working and paying self-employment taxes. So taking full advantage of capital and loss limit tax deductions is a good way to make sure that you enter the next year at the top of your game. FlyFin's CPA team can help guide you through the process of these deductions when you file your taxes through the app.
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