Claiming Capital Losses on Your Tax Return

You may be able to deduct some capital losses

Couple doing tax paperwork at home
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A capital losses happens when you sell an investment asset—such as a stock, bond, or mutual fund—and you lose money. The sale price is less than what you paid to acquire it. Capital losses on the sale of investment property are tax-deductible; losses resulting from the sale of personal property are not.

There are several rules that apply when claiming capital losses on your taxes. Learn what they are and whether they apply to your situation.

Key Takeaways

  • Losses and gains are classified as either short-term (asset held for a year or less) or long-term (asset held for more than a year).
  • To lower your taxable income, offset long-term gains with long-term losses, and short-term gains with short-term losses.
  • If you have an overall capital loss for the year, you can deduct up to $3,000 of its value from your taxable income.
  • If your overall capital loss is more than $3,000, you can carry the remainder forward to future tax years.

How Do I Use Capital Losses to Offset Capital Gains?

If you have both capital gains and capital losses, you can use the losses to offset the gains. You would subtract the value of your losses from the value of your gains. This would effectively become a deduction that can lower your taxable income.

Suppose you sold two investments last year. You bought one stock for $850, which you later sold for $1,000. That would mean you made a profit of $150. You also bought stock in another company at $800, which you later sold for $750. That would mean you lost $50 on the second investment.

The loss on the second transaction can be subtracted from your profit on the first transaction, offsetting it. Your taxable income from the two transactions works out to:

$150 - $50 = $100

The $50 loss on the second investment sale has reduced or offset the profit on the sale of the first investment. 

What Is the Holding Period for Capital Losses and Gains?

Handling capital losses and gains can be a little complicated. That's because income from capital gains can be taxed at different rates. The tax rate depends on how long you have held the asset.

Assets that you own for one year or less are considered short-term holdings. Gains from short-term investments are taxed at the same rate as your ordinary income.

You would have a long-term holding if you were to own the shares for more than one year. Gains from long-term investments are taxed at special capital gains tax rates of 0%, 15%, or 20%. The 20% rate affects only the highest earners.

Gains from selling collectibles can be taxed at a rate up to 28%, and gains from selling Section 1250 real property can be taxed up to a rate of 25%.

When using capital losses to offset capital gains, you have to group your losses and gains by their holding period. Short-term capital losses can only be used to offset short-term capital gains. Long-term capital losses can only be used to offset long-term capital gains.

Now suppose that you had four transactions ending in the current year. Two have short-term holding periods, and the other two have long-term holding periods. The situation would break down like this:

Description of property Date acquired Date sold Proceeds Cost or other basis Gain or (loss)
100 shares UVW 1/2/2021 6/30/2021 $1,000 $850 $150
50 shares XYZ 2/13/2021 09/15/2021 $750 $800 -$50
Net short-term gain subject to ordinary income tax:         $100
           
200 shares QRST 1/2/2018 7/14/2021 $10,000 $15,000 -$5,000
350 shares MNOP 2/28/2017 11/20/2021 $20,000 $11,000 $9,000
Net long-term gain subject to capital gains tax:         $4,000

What Can I Do With Overall Capital Losses?

Sometimes, your short-term gains or losses plus your long-term gains or losses result in a loss. When that happens, you have an overall loss that can be deducted against your other income. There are limits on how much of a loss you can claim, though, and when you can do so. 

You can use your overall capital losses to reduce your taxable income by $3,000 or the amount shown on line 16 of Schedule D, whichever is lower. If your losses are more than this amount, you can carry over the remaining loss to the next tax year or several years. For example, if you have $15,000 in losses, you can reduce your taxable income by $3,000 per year for the next 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 separate returns are limited to $1,500 per person on net capital losses.

A loss remains long-term or short-term when it's carried over to future years. This means that a short-term loss can only offset other short-term losses. The same rule applies to long-term losses, but any leftover long-term losses can then be applied to short-term gains.

How Do I File and Claim Losses?

Claiming capital losses requires filing IRS Form 8949, "Sales and Other Dispositions of Capital Assets," with your tax return. You will also need to file Schedule D, "Capital Gains and Losses" with your Form 1040.

Form 8949 is intended to assist the IRS in comparing information submitted by brokerage and investment firms with what you put on your tax return.

What Is 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 a stock at a loss. This rule prevents you from claiming the entire loss amount. 

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

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

It's sometimes possible to reinvest in different assets within the same sector, however, particularly when they have a different ticker symbol. The wash sale rule applies to substantially identical assets. 

If you are thinking about buying and selling similar stocks within a short period of time, or aren't sure whether your investment actions would be regulated by the wash sale rule, speak to a financial advisor before making any decisions.

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