When losing money on stocks, you will likely be eligible for a stock loss tax deduction on your upcoming tax return. However, you may not be able to deduct them all in any given year. If you don’t deduct them, you still have options available to you which can help you save money on your taxes. The IRS limits how much you can write off in a year, but it offers you a way to write off excess losses in subsequent years.
If you are planning on claiming stock loss deductions, you need to be aware of IRS-mandated limits to this particular tax policy.
Claiming Your Short and Long-Term Losses
When you hold stocks for a year or less, you count them as short-term stocks. Stock held longer than a year are referred to as long-term stocks. If you lose money on short-term stocks for the year, you are eligible for writing off investment losses from your standard income. That means you figure your income from a job or a business after deductions, then take off the short-term stock losses to lower your taxable income. Any losses taken from long-term stocks are deducted directly from long-term gains.
Deducting and Writing Off Investment Losses
You can write off up to $3,000 worth of short-term stock losses in any given year. Stocks you hold more than a year are long-term stocks. If you lose money on these, you count this as a long-term investment loss tax deduction. You can write off up to $3,000 worth of long-term losses each year, but you must figure your short-term losses first. For example, if you had $1,500 in short-term losses and an additional $2,000 in long-term losses, you could only write off $1,500 of the long-term losses that year, because you reached the $3,000 limit.
Carrying Over a Loss
When you can’t write off all of your stock losses in a year, you can carry over the loss to the next year. You can then write off the loss for that tax year as if you had incurred the loss in that year. You can still only write off up to $3,000 of stock losses, so if you exceed that for the following year, carry the loss over to subsequent years until you use up your total losses. When carrying over losses, keep short-term losses and long-term losses separate.
Exploring the "Wash Rule"
A tactic known as the "wash rule" has previously been used by investors. In this scenario, an investors aims to sell a stock in order to begin writing off investment losses, then buy the stock back immediately. The Internal Revenue Service created the wash rule to stop this practice. If you sell a stock and buy it back within 30 days, you cannot claim an investment loss tax deduction on the sale. If you wait longer than 30 days to buy back a stock you sold, you can deduct any loss you incurred on the sale.
Filing Your Stock Losses
In order to file short and long-term stock losses, you can use Schedule D as part of IRS Form 1040. Schedule D is commonly known as the primary form for reporting all capital gains profits and losses. Your short-term and long-term stock profits and losses are considered capital gains by the IRS.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.