Even the best investors don't pick winners every time. If you've bought stock that's declined in value and decided it's time to jump ship, timing the sale and reporting it properly on your taxes could help you offset some of the loss. You can use the losses to cancel out some or all of your capital gains for the year. If you sell the stock in a year in which you don't have losses to offset, or you have more losses than gains, you can deduct up to $3,000 in losses that don't offset gains. The limit is $1,500 per spouse if you're married filing separately. The remainder of the losses carry forward to future tax years.
Sell the stock, preferably in a year that you have capital gains to offset. Your brokerage should send you a Form 1099-B that documents the sale for tax purposes.Step 2
Calculate the amount of your loss by subtracting your proceeds from what you paid for the stock and the brokerage fees for buying and selling it. For example, say you bought it for $6,000 and paid $10 transaction fees to buy and sell and then sold it for $5,020. Subtract $5,020 from $6,020 to find your loss equals $1,000.Step 3
Count the time you held the stock before selling it to determine whether it is a long-term or short-term capital loss. Include the day you sold it, but not the day you bought it. Long-term capital losses come from selling stocks you've held for more than one year. If you held it for a year or less, it's a short-term capital loss.Step 4
Complete Form 8949. Use Part I for short-term losses and Part II for long-term losses. You need separate parts because you have to use short-term losses to offset your short-term gains and long-term losses against your long-term gains before combining the two.Step 5
Copy your net losses or gains from stocks to Schedule D. On Schedule D, you figure your total gain or loss, with all your other capital gains transactions during the year.Step 6
Copy your overall capital gain or loss to line 8 of Form 1040. This amount is included in your taxable income.
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."