How to Claim a Stock Loss on Taxes
When you click the “Buy” button in your brokerage account, you generally expect the stock to go up. Unless you are a short seller, you shouldn't be buying a stock hoping it will go down in value! But if you do make an investment that goes bad, there may be one redeeming point: You can use the stock loss to offset capital gains on profitable transactions.
While it isn't a very good consolation prize compared to a profitable investment, claiming stock losses on your taxes can be a valuable tax benefit and something you shouldn't overlook.
Read this guide to tax deductions for stock losses to learn how they work and how you can take advantage when filing your annual tax return.
How To Report Stock Losses on Tax Forms
Most brokerages give you access to your tax forms through the statements section of the website. Or they will send you a hard copy in the mail. A 1099-B, which may be included in a composite 1099 summary, shows your realized gains and losses from the prior year. If you have more than one investment account, you will receive a 1099-B from each one.
Your brokerage should give you line-item details on each stock you sold over the prior tax year. These will include the purchase cost, sale proceeds and purchase, and sale dates. That should be enough to complete your tax forms.
How to File a Stock Loss on Your Taxes
Use Schedule D to report realized gains and losses (gains and losses you made from selling stock). Schedule D is an addition to the main tax return, Form 1040.
Enter each sale on its own line on Schedule D. Separate your long-term and short-term gains and losses for the first two sections of Schedule D.
Many tax software programs will allow you to connect your investment accounts directly for faster and easier importing. Some will even calculate your capital gains and losses for you.
How a Stock Loss Lowers Your Tax Bill
Long-term capital gains are taxed at a rate of up to 20%, depending on your income. You pay no long-term capital gains tax if your income is less than $41,675 for the year. From $41,675 to $459,750, you pay 15%. Above $459,750 per year, you pay the top 20% rate. These brackets are for single filers.
For short-term capital gains, which are stocks and other assets you held for less than one year, you pay tax at your regular income tax rate.
Just as capital gains increase your tax bill, capital losses can lower your tax bill. Capital losses can offset realized stock profits for the year. If you have more losses than gains for the year, you can offset up to $3,000 of your regular income. Beyond that, you can carry forward your capital loss to offset future gains and then offset future income at a rate of $3,000 per year.
Learn more >>> What Are the 2022 and 2023 Capital Gains Tax Brackets?
Carry Forward Your Capital Losses
Not only can you use your capital losses to offset your capital gains and income in the current tax year, but your losses carry forward indefinitely. Let’s say you have a lousy year and realize a loss of $15,000. This year, you have $2,000 in realized capital gains, so you offset those. Then you reduce your taxable income by $3,000. You use a total of $5,000 of your losses, leaving you to carry forward $10,000.
Next year, you don’t have any capital gains to offset. So you just take $3,000 to reduce your taxable income and carry forward the remaining $7,000. The following year, you have $2,000 in capital gains, so you offset that and also take your taxable income deduction. Even after all that, you’ll still have another $2,000 in losses to carry forward into the fourth year.
Never Let a Stock Loss Go to Waste
If you have a robo-advisor for your investments, a computer can buy and sell assets to take advantage of swings in the market to help capture small capital losses for you throughout the year. This is called tax-loss harvesting and can be a valuable tax management strategy for investors. Because losses can be carried forward indefinitely, some investors choose to “harvest” losses near the end of each year.
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Whatever you do, don't sell an asset for a loss and let the loss go to waste. Whether it is a short-term loss or a long-term loss, it can help you save money on your taxes. It's better to get a profit and pay taxes. But if you have a loss, you should never let it go to waste.
