If you made a bad stock investment and ended up losing money, you can use that loss to lower your taxes for the year. However, you can't claim the loss until you actually sell the stock. For example, just because the value of your portfolio went down, it doesn't entitle you to a deduction until you actually sell the stock.
When figuring your losses on individual stock investments, you subtract your gross proceeds from the sale from what you paid for the stock. When figuring what you paid, include the cost of any transaction fees or brokerage fees. For example, if you bought the stock for $900 and paid a $10 fee, your basis is $910. Similarly, when you figure your proceeds, don't count the portion that went to fees. If you later sell the stock for $720, but paid $10 in commissions, your proceeds are only $710, giving you a loss of $200.
Loss Deduction Limits
You're limited to deducting a maximum of $3,000 of your losses per year, or $1,500 each if you're married but file separate returns. However, the limit is for net losses, which means that you first use your losses to offset any gains for the year. For example, say you had $15,000 in stock gains for the year and $25,000 in losses. You first offset your $15,000 of gains with $15,000 of losses, leaving you a net loss of $10,000. Then, because of the limit, you can only claim a $3,000 deduction against your other income.
When you file your taxes, you have to use Form 1040. However, you first have to compete Form 8949 to show your gains and losses on each stock you held during the year. Next, you have to complete Schedule D to show the offsetting of your capital gains with your capital losses. Finally, you take the deduction on line 13. Put parenthesis around your loss so it isn't counted as a gain. For example, a $3,000 loss is reported as "(3000)."
If you have more losses than you're entitled to take in any given year, the IRS allows you to carry that loss forward to future years. The IRS does not limit how many years into the future you can carry it over, but you must use as much of the deduction as you can each year. For example, say you have a $7,000 loss carryover. The following year, if you have $2,000 in gains, you have to use $2,000 to offset the gains and $3,000 as a deduction, so you can only carry the last $2,000 over into the third year.
- tax forms image by Chad McDermott from Fotolia.com