Claiming Capital Losses on Your Tax Return

A loss occurs when you sell an asset for less than you paid for it

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When you have a negative profit after selling an investment asset such as stocks, bonds, mutual funds, or real estate, you've incurred a capital loss. The money received from selling the asset is less than the amount of money you paid to acquire it. The loss brings with it a host of tax implications. 

Capital Losses Offset Capital Gains at the Transaction Level

Let's say you sold two investments last year.

You bought one stock at $850 which you later sold for $1,000, so here you made a profit of $150. You also bought stock in another company at $800 which you later sold for $750. You lost $50 on this second investment.

The loss on the second transaction is subtracted from your profit on the first transaction so your taxable income from these two transactions becomes $100, or $150 less $50. The $50 loss on the second investment sale has reduced or offset the profits on the first investment sale. 

Example: How capital losses offset capital gains at the transaction level

Description of property

Date acquired

Date sold

Proceeds

Cost or other basis

Gain or (loss)

100 sh UVW

01/02/17

06/30/17

1,000

850

150

50 sh XYZ

02/13/17

09/15/17

750

800

–50

Net gain subject to tax

 

 

 

 

100

Capital Losses Offset Capital Gains of the Same Holding Period

It gets a little more complicated from here because income from capital gains is taxed at different rates depending on how long you hold the asset.

The sale diagrammed above shows a short-term gain. Assets owned for one year or less are short-term holdings, and gains from short-term investments are taxed at regular tax rates ranging from 10 percent to 37 percent as of 2018. Only the very highest earners pay a 35 percent tax rate, however. 

If you had own the shares for more than one year, this would be a long-term holding.

Gains from long-term investments are taxed at special rates of zero, 15, or 20 percent. Again, the 20 percent rate affects only the highest earners.

All gains and losses of short-term transactions are added together to find the net amount of short-term gain—or loss if the amount of income is negative. Similarly, all gains and losses of long-term transactions are combined to find the net amount of long-term gain or loss. 

Combined, the two rules fit together like this:

  • Losses on short-term transactions are subtracted from short-term gains to result in a net amount of short-term gain or loss.
  • Losses on long-term transactions are subtracted from long-term gains to result in a net amount of long-term gain or loss.

Now let's say you have four transactions ending in the current year. Two have short-term holding periods and the other two have long-term holding periods. Now the situation would break down like this:

Example: How capital losses offset capital gains of the same holding period

Description of property

Date acquired

Date sold

Proceeds

Cost or other basis

Gain or (loss)

100 sh UVW

01/02/17

06/30/17

1,000

850

150

50 sh XYZ

02/13/17

 09/15/17

750

800

–50

Net short-term gain subject to tax

100

 

 

 

 

 

 

200 sh QRST

01/02/15

7/14/17

10,000

15,000

–5,000

350 sh MNOP

02/28/14

11/20/17

20,000

11,000

9,000

Net long-term gains subject to tax

4,000

Overall Capital Losses

When your short-term gains or losses plus your long-term gains or losses result in a loss when they're added together, you have an overall loss that can be deducted against your other income  And if the total of your capital losses is more than the total of your capital gains, the difference is deductible, although there are limits on how much of a loss you can deduct and when you can do so. 

Let's say you have a net short term gain of $1,000 and a net long-term loss of $500. The long-term loss reduces the short-term gain so you're taxed on only $500 of positive income.

If you had a net short-term loss of $2,000 and a net long-term gain of $3,500, the short-term loss would reduce the long-term gain so you would be taxed on only $1,500 of positive income.

Finally, if you had a net short-term loss of $2,000 and a net long-term loss of $2,000, the short-term loss and the long-term loss would combine to an overall loss of $4,000.

This is the amount that can be used to reduce other income on your tax return. 

Limitations on Overall Net Losses

You can deduct up to $3,000 per year in net capital losses against your other income. If your net losses exceed this amount, the remainder can be carried over to following years. This $3,000 limit applies to taxpayers using the single, head of household, married filing jointly, or qualifying widow/widower statuses. Married people filing separately are limited to $1,500 per person on their net capital losses.

Now let's say you have five transactions:

Example: How overall net losses work

Description of property

Date acquired

Date sold

Proceeds

Cost or other basis

Gain or (loss)

100 sh UVW

01/02/17

06/30/17

1,000

850

150

50 sh XYZ

02/13/17

9/15/17

750

800

–50

Net short-term gain or loss

100

 

 

 

 

 

 

200 sh QRST

01/02/15

7/14/17

10,000

15,000

–5,000

350 sh MNOP

02/28/14

11/20/17

20,000

11,000

9,000

400 sh IJKL

03/15/16

12/28/17

5,000

13,000

–8,000

Net long-term gain or loss

–4,000

Overall net capital loss (short-term gain + long-term loss)

–3,900

Amount deductible against other income this year

3,000

Amount of capital loss carried over to next year

900

Carryover Losses Retain Their Character As Short-Term or Long-Term

According to the IRS in Publication 544, "…When you carry over a loss, it retains its original character as either long term or short term. A short-term loss you carry over to the next tax year is added to short-term losses occurring in that year. A long-term loss you carry over to the next tax year is added to long-term losses occurring in that year. A long-term capital loss you carry over to the next year reduces that year's long-term gains before its short-term gains.

"If you have both short-term and long-term losses, your short-term losses are used first against your allowable capital loss deduction. If, after using your short-term losses, you have not reached the limit on the capital loss deduction, use your long-term losses until you reach the limit." 

The Wash Sale Rule

If you buy substantially identical stock or securities within 30 days before or after you sell stock at a loss, the losses are suspended under what's known as the "wash sale rule". In other words, you can't claim the entire loss amount. 

Suppose you sell your stock in XYZ company at a loss on March 31. If you bought the stock in XYZ company 30 days before this date or purchased the same stock up until to 30 days after this date, you have a wash sale situation.

In this example, your wash sale period runs from March 1, or 30 days before, to April 30, which is 30 days after. If you were to buy XYZ stock at any point during this time frame, you would not be able to claim the full amount of the loss from the March 31 sale. Instead, you would have to take the loss amount and add it to your cost basis in the new shares you purchased.