If you lose money on the stock market, you may be able to deduct the value of your losses from your taxable income on Form To deduct a loss, you must have actually incurred it -- losses that appear only on paper due to fluctuating stock prices do not entitle you to a deduction. For tax purposes, the amount of your capital loss for a particular stock transaction is equal to your shares' adjusted basis minus the price you sold them for.
The basis of your shares equals the amount you paid for them plus any associated fees, such as brokerage fees. The basis may be adjusted under certain circumstances, however.
If there was a stock split after you purchased your shares, for example, you must adjust your shares' basis to reflect the magnitude of the split -- a 2-for-1 stock split, for example, would require you to reduce each share's basis by 50 percent.
If you sold your stocks after holding them for no more than a year, your capital loss was short-term. If you sold them after holding them for more than a year, your loss was long-term. This distinction is important not only in calculating your deduction, but also in determining your taxable capital gains from other transactions you may have engaged in.
Since you can use short-term capital losses to offset short-term capital gains, and since short-term capital gains are taxed at a higher rate than long-term capital gains, short-term capital losses can be particularly useful in reducing your tax bill.
To calculate your deductible capital loss, add together all of your capital losses during the tax year from any transaction involving investment property, whether or not stock-related -- losses from the sale of rental property, for example.
You must also add together all of your capital gains. Next, you must classify your gains and losses into net short-term and net long-term gains or losses. Finally, offset your net short-term gain or loss against your net long-term gain or loss.
Tax Tips For The Individual Investor
If the final result is negative, you have incurred a net capital loss for the year. If it is zero or positive, you have no capital loss to write off. Report your capital losses on Form and Form If your only capital gain or loss is a capital loss carried forward from a previous tax year, you may not even have to file Form David Carnes has been a full-time writer since and has published two full-length novels.
He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.
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Capital Losses For tax purposes, the amount of your capital loss for a particular stock transaction is equal to your shares' adjusted basis minus the price you sold them for.
Long-Term Losses If you sold your stocks after holding them for no more than a year, your capital loss was short-term. Calculating Your Loss To calculate your deductible capital loss, add together all of your capital losses during the tax year from any transaction involving investment property, whether or not stock-related -- losses from the sale of rental property, for example.
References 6 Internal Revenue Service: Ten Important Facts About Capital Gains and Losses Internal Revenue Service: Topic - Capital Gains and Losses Bankrate. Capital Losses Can Cut Taxes Internal Revenue Service: RS Reminds Taxpayers They Can Use Stock Losses to Reduce Taxes Internal Revenue Service: Sales and Trades of Investment Property Internal Revenue Service: Eight Facts about New IRS Form and Schedule D. Photo Credits Zeitung lesen image by Digitalpress from Fotolia.
About the Author David Carnes has been a full-time writer since and has published two full-length novels.
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