Are There Limits to Stock Loss Deductions?

When losing money on stocks, you can deduct your losses on your tax return. However, you may not be able to deduct them all in any given year. If you don’t deduct them, you still have options to save money on your taxes. The IRS limits how much you can write off in a year, but it offers you a way to write off excess losses in subsequent years.

Short-term Losses

When you hold stocks for a year or less, you count them as short-term stocks. If you lose money on short-term stocks for the year, you write them off of your ordinary income. That means you figure your income from a job or a business after deductions, then take off the short-term stock losses to lower your taxable income. You can write off up to $3,000 worth of short-term stock losses in any given year.

Long-term Losses

Stocks you hold more than a year are long-term stocks. If you lose money on these, you count this as a long-term loss. You can write off up to $3,000 worth of long-term losses each year, but you must figure your short-term losses first. For example, if you had $1,500 in short-term losses and an additional $2,000 in long-term losses, you could only write off $1,500 of the long-term losses that year, because you reached the $3,000 limit.

Carryover

When you can’t write off all of your stock losses in a year, you can carry over the loss to the next year. You can then write off the loss for that tax year as if you had incurred the loss in that year. You can still only write off up to $3,000 of stock losses, so if you exceed that for the following year, carry the loss over to subsequent years until you use up your total losses. When carrying over losses, keep short-term losses and long-term losses separate.

The Wash Rule

Investors used to sell a stock to take a loss on their taxes, then buy the stock back immediately. The Internal Revenue Service created the wash rule to stop this practice. If you sell a stock and buy it back within 30 days, you cannot claim a loss you incur on the sale. If you wait longer than 30 days to buy back a stock you sold, you can deduct any loss you incurred on the sale.

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