Gains that results from buying and selling valuable assets, such as stocks, bonds and real estate are referred to as capital income. While you will only owe taxes when you actually register a profit, it is to your benefit to report losses as well to the Internal Revenue Service.
Reporting Capital Gains
Whether the asset in question is a stock, bond or a house, you will report capital gains to the tax authority when you sell the asset, not when you make a purchase. If the purchase and sale occur during the same year, you must report the net gain or loss on that year's income tax return. If you only sold a portion of the shares you purchased, you will only report the amount you have sold during the year and the associated gains or losses. The remaining shares are reported to the IRS when you sell them.
Even if you lost money on the sale, you report the loss. The loss from the sale of one stock will cancel the gain from the sale of another stock, and such losses reduce your taxable net gains. Even if you only had a single stock trade during the year, you should still report the loss on your income statement so you can carry this loss forward. Carrying a loss forward means using the loss from one year to offset your gains in future years. If, for example, you lost $5,000 trading one stock in 2012 and make $6,000 trading another stock in 2013, your taxable net stock gain in 2013 would register as $1,000.
Deductions Against Other Income
If you have other taxable income during the year when you lose money from your stock transactions, you can deduct up to $3,000 of this loss from your ordinary income. Assume you lost $5,000 from trading one stock but earned $30,000 from your salaried job during the year. Deducting $3,000 of your losses from your salary would reduce your taxable net income to $27,000. Your tax liability would consequently decline. The remaining $2,000 loss from the stock trade would then be carried into the next year. This is one more reason you should report even losing trades on your income tax return.
Since taxpayers only have to report stock transactions when they sell, many people neglect to keep proper records -- especially if they intend to hold on to a stock for many years in a retirement account, they may toss account statements into a drawer where they will be very hard to locate 10 years later. To avoid problems down the line, record the precise date of each transaction, the commissions you have paid, the exact name of the stock's issuer as well as the stock's ticker symbol, which is the acronym that the stock is recorded by in financial transactions. You will need all of this information when reporting the eventual gain or loss.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.