Smart TaxesSmart Taxes

Stock loss? It'll help at tax time

Treatment of short-term and long-term losses is different, but either may get you a reduction in taxable income, and therefore tax owed.

By MSN Money Partner Dec 15, 2011 5:27PM

This post is by Kay Bell at


Plummeting stock prices can cast a dark cloud over anyone's finances. However, at tax time, these capital losses can produce a ray of write-off sunshine.


When you sell any pharmaceutical flops or banking blunders, you can use them to offset gains from more successful ventures -- or even a portion of your everyday income.


A capital loss is the result of selling an investment at less than the purchase price or adjusted basis. Any expenses from the sale are deducted from the proceeds and added to the loss.


The key point is that capital losses are only losses after you sell them. A stock sitting in your portfolio with a deflated price may cause you distress, but it doesn't do you any tax good until you dump it. (The sale of personal-use property, such as a car, doesn't get this favored tax treatment. Such losses can't be deducted as capital losses.)


You can recoup a percentage of a true loss from the taxman. This is one of the best deductions available to investors. A capital loss directly reduces your taxable income, which means you pay less tax. It makes for a nice consolation prize.


Post continues below.

It's touching that the Internal Revenue Service wants to give you a break when the stock market tanks. However, this doesn't mean the weighing and applying of capital losses is simple.


You must fill out Schedule D, where you'll discover that losses are categorized as short-term and long-term, just like gains. The value of the deductible loss depends on how the loss is applied. Sadly, the taxpayer doesn't get to choose.


Here's how it works:

  • Short-term losses counterbalance those expensive short-term gains. What's left at the end of Section I of Schedule D is the net short-term capital gain or loss. If there were no gains, then obviously the net would equal the total loss.
  • Long-term losses are applied to long-term gains. The result, at the end of Section II of Schedule D, is the net long-term capital gain or loss. Again, if you only have a loss, then the net is a negative number.
  • Next, you combine the short-term and long-term results. At this point, a loss in one section can offset a gain in the other section. For example, if you have a net short-term loss of $1,000 and a net long-term gain of $1,200, then you'll pay tax on only $200.
  • If there's still a loss, you can deduct up to $3,000 from other income.
  • If you had a really bad year and ended up with a net loss of more than $3,000, you can carry forward the leftover portion to next year's taxes. The unused loss can be applied to next year's gains as well as up to $3,000 of earned income. A big loss can be used as a deduction indefinitely -- another important reason to keep good records.

In an effort to catch rich parents who were trying to circumvent investment taxes by putting assets in the names of their children, the "kiddie tax" was enacted in 1986. Don't be confused by the name. Under this law, a kiddie portion of taxes usually is quite large.


Basically, the law requires a child's investment earnings over a certain amount to be taxed at the parent's higher tax rate until the child reaches a specific age, 19 or 24 if the child is a full-time student.


If parents find themselves liable for more investment income than they had planned because they had to cover the taxes on their children's asset earnings, one of the easiest ways for that parent to reduce or eliminate the unexpected gains is to sell assets that produce offsetting losses.


More from and MSN Money:


Dec 17, 2011 1:13AM

I always hated the tax write off angle as a sort of consolation prize for poorly performing investments...I'd rather have profits and pay the taxes...


Dec 20, 2011 11:37AM
i guess this means if i had 10,000 in my 401k and now it is worth nothing i can deduct 10,000 from my gross income? what if they can keep charging me maybe i will owe them 10,000 of my future earnings? one thing for sure THE GREAT DEPRESSION will continue
Aug 15, 2013 9:41PM
why can't  you replace another stock from the money from a loss on a stock with out losing on a "wash sale"?i
Aug 15, 2013 9:36PM
Dec 20, 2011 1:02PM

Thank you Kay, for passing along this useless information. Wow, we are so lucky to be a part of this wonderfull financial debacle! Just keep stuffing money into the market and it will be good for you even if you lose everthing! You'll get a tax break!


How about this, Kay, why are we forced to put our "Retirement" money into the Stock Market? Explain that to us little investors! Why is our money being forced into a program that can strip away all of our savings that we are supposed to depend on to keep us from being a "Burden" on Society when we get too old to work? Why isn't there a "Defined Benefit" plan for us old people to keep our "Retirement" funds in? A 401k is just a "Defined Loss Plan"!

Dec 17, 2011 12:53AM

Anybody who doesn't have tax losses (and tax-loss carryforwards) from the last few years hasn't been much of an investor.


For all the evil rich haters and class enviers, you can get your shorts in an even bigger bind hyperventilating over all the "rich"  who will reduce their tax bills this year because they've LOST money in the stock market.


Next year, you can obsess some more when the second tier deduct all their losses from speculating in gold.

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