Everyone wants to be the next Warren Buffet, but even the best investors end up with a few losing picks along the way. But, as long as you're still holding the stock, Uncle Sam doesn't want to hear about it on your taxes, because the value could still go back up. So, no matter how much the value of your stock has dropped, nothing happens to affect your taxes until you sell your shares. Until then, it's just an unrealized loss.
Calculating Your Loss
At least for tax purposes, your loss could be even bigger than you first thought -- which is a good thing. Instead of just subtracting the sales price from the purchase price, you first have to add your acquisition costs, such as broker fees, to the purchase price to figure your basis. Then, you have to subtract your sales costs -- again, likely broker fees -- from your sales price to find your net proceeds. Last, you subtract your net proceeds from your basis to figure your loss for tax purposes.
Tax Uses for Losses
Your realized stock losses help you in two ways on your taxes. First, you can use them to cancel out any other stock gains during the year. For example, if you have a $6,500 loss and a $1,500 gain from another stock sale, you can wipe out that gain completely. Second, you can deduct up to $3,000 in excess losses ($1,500 per spouse if you're married filing separately). Continuing the example, you could claim a $3,000 deduction to offset other income, because you have an extra $5,000 in losses.
If you've got more losses than you can use in a single year, don't fret -- at least about the tax consequences. The Internal Revenue Service doesn't put a deadline on how long you can take to use up your losses as long as you're taking the maximum each year. For example, if you have a net $5,000 loss for the year, you would take $3,000 that year and then carry over the remaining $2,000 to the next year.
Stocks in IRAs
If you've got stocks in your individual retirement account, the rules for taking losses are different: You're not allowed to claim a loss for each time you sell a loser. Instead, the only way you can take a loss for investments in your IRA is if you close all similar accounts -- such as all your traditional IRAs or all your Roth IRAs -- and the total amount of distributions is less than the amount of nondeductible contributions you've made. If you haven't made any nondeductible contributions, there's no way to claim a write-off for your losses. And it gets harder: The deduction is a miscellaneous deduction subject to the 2 percent of adjusted gross income limit, which means you only get to write off the portion of your loss that exceeds 2 percent of your AGI.
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