Not every investment goes as well as you hope, and sometimes you’re forced to sell an investment at a loss. However, all is not lost, because the unprofitable investment generates a capital loss for income tax purposes that you can use to reduce your taxable income. However, the write-off for capital losses isn’t an itemized deduction. Instead, capital losses appear as a separate line item on your income tax return.
Deducting Capital Losses
Capital losses can be used to lower your taxable income each year. First, your capital losses offset any capital gains you have for the year. You must use your long-term capital losses to offset long-term capital gains and short-term capital losses to offset short-term capital gains. However, if you have excess losses in either category, you can use them to offset additional gains in the other category. If you still have excess capital losses, you can write off up to $3,000 ($1,500 if married filing separately) against other income you earned during the year. Any remaining capital losses can be carried to the following year. You can claim these deductions regardless of whether or not you claim the standard deduction or opt to itemize your deductions.
For example, if you had $10,000 in long-term capital losses, $4,000 long-term capital gains and $2,000 in short-term capital gains, you would first offset the full $4,000 of long-term capital gains, leaving you with an additional $6,000 of capital losses. Then, you can offset the full $2,000 of short-term capital gains, leaving you with $4,000 of undeducted capital losses. Next, you can use $3,000 to offset other income from the current year, such as salary or interest income. Finally, you can carry forward the last $1,000 to offset income the following year.
Claiming the Standard Deduction
The standard deduction varies depending on your filing status. In 2017, the standard deductions were $12,700 for married couples filing jointly, $6,350 for single filers and married couples filing separately and $9,350 for heads of household. In 2018, the standard deduction jumped dramatically under the Tax Cuts and Jobs Act to $24,000 for couples filing jointly, $12,000 for single filers and couples filing separately and $18,000 for heads of household.
When you file your taxes, you have the option to claim either the standard deduction or the sum of your itemized deductions, but not both. Major itemized deductions include state and local taxes, medical expenses, mortgage interest and donations to charity. However, capital losses aren’t included as part of the list of itemized deductions, so your capital losses for the year won’t affect whether you itemize or not.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."