Claiming Capital Losses on Your Tax Return

You Can Deduct Capital Losses Subject to Certain Rules

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You've incurred a capital loss when you have a negative profit after selling an investment asset such as a stock, bond, mutual fund, or real estate. The money received from selling the asset is less than the amount of money you paid to acquire it. 

Capital losses on the sale of investment property are tax deductible, although losses resulting from the sale of personal property are not. And numerous rules apply.

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 the two works out to $100—$150 less $50. The $50 loss on the second investment sale has reduced or offset the profit on the first investment sale. 

Example

How capital losses offset capital gains at the transaction level:

Description of propertyDate acquiredDate soldProceedsCost or other basisGain or (loss)
100 sh UVW1/2/20196/30/2019$1,000$850$150
50 sh XYZ2/13/20199/15/2019750800–50
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.

Our example 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 2019. Only the very highest earners pay a 37 percent tax rate.

It would be a long-term holding if you had owned the shares for more than one year.

 Gains from long-term investments are taxed at special capital gains 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 determine the net amount of short-term gain or, if the amount of income is negative, short-term loss. Similarly, all gains and losses of long-term transactions are combined to find the net amount of long-term gain or loss. 

Now let's say that 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 propertyDate acquiredDate soldProceedsCost or other basisGain or (loss)
100 sh UVW1/2/20196/30/2019$1,000$850$150
50 sh XYZ2/13/2019 09/15/19750800–50
Net short-term gain subject to tax:    $100
      
200 sh QRST1/2/20177/14/2019$10,000$15,000–5,000
350 sh MNOP2/28/201611/20/201920,00011,0009,000
Net short-term gain 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 added together, you have an overall loss that can be deducted against your other income.

There are limits on how much of a loss you can deduct, however, and when you can do so. 

If 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...but not all at once. 

Limitations on Overall Net Losses

You're limited to $3,000 per year in net capital losses that you can deduct from your other income, but this doesn't mean that any losses over this amount are wasted.

The remainder can be carried over to following years and can be applied to gains and income at that time.

There's no limit to the number of years you can do this. For example, if you realize $15,000 in losses, you can stretch it out over five years. 

This $3,000 limit applies to taxpayers who use the single, head of household, married filing jointly, or qualifying widow/widower filing statuses. Married people filing separately are limited to $1,500 per person on net capital losses.

Example: How Overall Net Losses Work

Now let's say you have five transactions:

Description of propertyDate acquiredDate soldProceedsCost or other basisGain or (loss)
100 sh UVW1/2/20196/30/2019$1,000$850$150
50 sh XYZ2/13/20199/15/2019750800–50
Net long-term gain or loss:    $100
      
200 sh QRST1/2/20177/14/2019$10,000$15,000–5,000
350 sh MNOP2/28/201611/20/201920,00011,0009,000
400 sh IJKL3/15/201812/28/20195,00013,000–8,000
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 

"…When you carry over a loss, it retains its original character as either long term or short term," according to IRS Publication 544. "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." 

How to File and Claim Losses

Claiming capital losses requires filing IRS Form 8949, Sales and Other Dispositions of Capital Assets, with your tax return, in addition to Schedule D, Capital Gains and Losses

Form 8949 is relatively new. It's intended to assist the IRS in comparing information submitted by brokerage and investment firms with that on your own tax return. Schedule D has been revised as well.

The Wash Sale Rule

Losses are suspended under what's known as 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 rule prevents you from claiming the entire loss amount. 

  • Suppose you sell your stock in XYZ company at a loss on March 31. You have a wash sale situation if you bought the stock in XYZ company 30 days before this date or purchased the same stock up until 30 days after this date.
  • 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. You would have to take the loss amount and add it to your cost basis in the new shares you purchased instead. 

Speak with a financial adviser if you find yourself tempted to make a move in this direction. It's sometimes possible to reinvest in different assets within the same sector, particularly when they have a different ticker symbol. The wash sale rule applies to identical assets. 

Note: Tax laws change periodically and you should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.