Losing money on a stock you've invested in is never welcome news. However, you can minimize the damage by claiming the loss as a deduction on your income taxes. Writing off a stock market loss is a bit complicated because you must combine it with other capital gains and losses you had during the year.
Stock market gains or losses do not have an impact on your taxes as long as you own the shares. It's when you sell the stock that you realize a capital gain or loss. The amount of gain or loss is equal to the net proceeds of the sale minus the cost basis. Net proceeds are the gross sale proceeds minus sales costs such as broker's commissions. Cost basis is the price you paid for the shares plus any transaction costs. If the cost basis is more than the net proceeds, you have a loss on the stock.
Grouping Gains and Losses
A stock sale can yield a short- or long-term gain or loss. The gain or loss is short-term if the stock is owned for one year or less. If you own the shares for more than a year, they are a long-term investment for tax purposes. When figuring losses and gains for your income taxes, you first use losses to offset gains of the same type. Thus, add a long-term stock loss to other long-term capital losses and subtract them from the total amount of long-term gains for the year to figure long-term gain or loss. Subtract your total short-term capital losses from short-term capital gains to find net short-term gain or loss.
When you have a net short-term or long-term loss from stock trades and other investments, it may be used to offset net gains of the other type. That is, a net short-term loss can be subtracted from a net long-term gain, and a net long-term gain is subtracted from a net short-term loss. If you have an overall loss after offsetting net gains, it may be deducted from your other income such as your salary, up to a limit of $3,000. Overall capital losses in excess of $3,000 can be carried forward to future years.
Keeping accurate records of short- and long term stock market losses and gains is essential because the tax consequences are different. Long-term gains are taxed at a maximum rate of 15 percent. Short-term gains are taxed at ordinary income tax rates, which were as much as 35 percent as of 2012. Suppose you have a stock market loss of $2,000. When you claim it as a deduction on your income taxes, it can save you at most $300 if you must use it to offset long-term gains. However, when you can use the loss to offset short-term gains or other income, your tax savings can be as much as $700.