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Most investors suffer stock market losses from time to time. Knowing how the Internal Revenue Service treats the deductions can help you decide when to bite the bullet and sell your losing stocks to maximize the tax breaks. The losses that you can claim depend on the amount of capital gains you have to offset for the year.
You can only claim stock market losses on your taxes when you actually sell the stock, not just because the market price went down. The loss on each stock trade equals the amount you spent to buy it, which includes brokerage fees, minus the amount you received for selling it, less brokerage fees. For example, say you bought the stock for $800, sold it for $716 and paid $8 in broker fees on both trades. Your loss would be $100.
Canceling Out Gains
The IRS allows you to use your losses to offset your capital gains for the year. The amount of losses you can use each year to offset your gains is limited only by your total gains. For example, if have $5,000 in gains for the year, you can only use $5,000 of losses to offset those gains. Alternatively, if you had $100,000 of gains, you could use $100,000 in losses that year.
Excess Loss Deduction
If you've got more losses than gains, most taxpayers can take up to $3,000 of the losses as a tax deduction that year. Any additional losses must be carried over to a future tax year and used either to offset that year's gains or to claim another deduction. For example, if you have $15,000 in losses remaining after offsetting all of your gains, you can deduct $3,000 from your taxable income and then carry the extra $12,000 over to the next year. You can continue to deduct the loss in future years until you use it all.
Retirement Plans Not Included
Generally, you can't take a deduction on your taxes for stock market losses in a retirement plan, like an IRA or 401(k). To claim a deduction, you have to close all accounts of the same type, such as all your Roth IRAs. The loss equals the amount of nondeductible contributions you've made to the account minus all the distributions you've received. Even if you meet all the requirements, the deduction is subject to a threshold of 2 percent of adjusted gross income threshold, so any losses less than 2 percent of your AGI aren't deductible, either. In addition, if you're hit with the alternative minimum tax, your deduction is disallowed.
- Internal Revenue Service: Topic 409 - Capital Gains and Losses
- Internal Revenue Service: Publication 550 - Investment Income and Expenses
- Smart Money: How to Deduct IRA Losses
- Internal Revenue Service: Publication 590 - Individual Retirement Arrangements (IRAs)
- CNN Money: Can I Deduct 401(k) Losses?
- Smart Money: Tallying Your Capital Gains and Losses
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