A Complete Guide to Taxing Stock Losses • Benzinga

A bear market is not a fun experience for most investors. When stocks across all sectors are falling and falling, investors become more prone to panic as emotions begin to run high. When will the bottom settle? How much longer will the decline last? And of course, how much pain can one tolerate before giving in to the urge to sell?

Different investors will answer these questions in different ways, but no one likes losing money. Investment losses can be painful; however, there is some solace to be found in the rules regarding taxation of stock losses. In down years, investors may be able to amortize a certain percentage of the losses incurred by their portfolios. Here’s how it works.

How does stock loss taxation work?

A fixed asset is basically anything of value that you own, including stocks and bonds, but also houses, cars, artwork, and even furniture in your living room. If you sell your sofa for more than you paid for it, you realize a capital gain on the sale. The IRS expects these gains to be reported, but if you’ve held the asset for a while, you’ll get a little break.

Capital gains are taxed at a favorable rate — long-term capital gains are taxed at 0%, 15% or 20% depending on the taxpayer’s income. Short-term capital gains are taxed at the level of the investor’s adjusted gross income for the year, which is less favorable than the long-term rate. Holding assets for terms measured in years is obviously ideal, but sometimes it makes sense to sell something less than a year after buying it. This distinction between long-term and short-term capital gains is important because capital loss tax deductions are calculated the same way.

To claim your stock losses on your annual tax return, you’ll need to separate long-term and short-term losses, just as you would separate long-term and short-term gains. Assets bought and sold at a loss after less than one year will be considered a short-term capital loss, with some exceptions (inheritance). To determine your total taxable liability, you will need to match your gains and losses based on how long you have held each particular asset.

How to determine your capital losses

Like capital gains, capital losses are divided into short-term and long-term transactions. To determine your total capital losses, you match your gains and losses according to the type of tax treatment they receive.

Short-term capital gains are taxed as ordinary income, which can be as low as 10% or as high as 37% depending on your modified adjusted gross income (MAGI). If you bought $10,000 worth of shares in March 2020 and sold them for $25,000 in August 2020, you will have a gain of $15,000 taxed at your income level (between 10% and 37%) . However, if you bought shares in March 2020 and sold them for $25,000 in April 2021, you would have a gain of $15,000 taxed at the capital gains rate (15% for single filers with incomes between $40,400 and $445,850).

Consider if you have another set of stocks that didn’t make any money – in fact, you lost on trades. You can deduct these losses from your capital gains depending on how long you have held the asset. If you have a short-term loss of $5,000, you cannot deduct it from a long-term gain of $10,000. Short-term gains and losses must be matched, like long-term gains and losses.

How to Claim Capital Losses

You will need the IRS Form 8949 and Program of Form 1040 to correctly calculate your long-term and short-term capital gains and losses. Each individual stock trade will be counted on Form 8949, and your total stock loss deduction will be calculated on the Schedule D portion of Form 1040. Gains and losses will be separated by long-term or short-term status, but calculated together at the end of the form. Here is an example :

Record all of your stock purchases and sales on Form 8949. Part I is for short-term transactions and Part II is for long-term transactions. All of your purchases and sales will be reported here, which is why it pays to use a broker with effective tax documentation. An asset held for 3 days or 10 months will receive the same tax treatment on short-term capital gains, likewise for one year and one day or 50 years in the long term.

Take your total short-term capital gains and deduct any short-term capital losses from Part I. If you have $10,000 in gains and $4,000 in losses, your net short-term capital gains income would be $6,000 and you would be taxed at your regular income level.

Now add up the long-term gains and losses from Part II. Sales of assets held for more than one year will be reported here. Let’s say you made $20,000 on a long position and want to sell, but you also suffered a loss of $25,000 on another long position. You sold both positions in the same tax year, resulting in net long-term capital loss of $5,000.

It’s Schedule D time – add up your long and short term gains or losses on this sheet to determine your total tax liability on your stocks. Although you cannot amortize a short-term loss with a long-term gain, you can add up the total of these different sets of transactions. In the example above, the result was $6,000 in short-term gains and $5,000 in short-term losses. The $5,000 of total capital losses would offset the $5,000 of short-term capital gains, leaving $1,000 of short-term gains to be taxed as ordinary income.

What happens to taxation of shares if losses exceed earnings? In very bad years, investors could end up with a net loss on their capital transactions. In this scenario, capital losses can be deducted directly from income but only up to a certain limit. For single filers, $1,500 of total capital losses (short and long term combined) can be written off per year. Married couples receive up to $3,000. So, if you have a capital loss of $6,000 in 2021, you will only be able to deduct $3,000 from your 2021 taxable income. However, you can carry forward additional losses using the loss carryforward worksheet. capital from publication 550. In this situation, $3,000 of capital losses can be deducted in 2021 and the remaining $3,000 can be used in 2022.

Use inventory losses to your advantage

No investor has a 100% winning track record. But many choose to use their losers to advantage. Tax-loss harvesting is a technique in which losing stocks are matched with winning stocks in order to reduce a tax bill or keep income below a certain tax bracket. This method is one of the best ways to use taxation of stock losses in your favor.

For example, imagine you have $15,000 of short-term capital gains to report, bringing your total MAGI for the year to $180,000. The upper limit of the 24% tax bracket is $170,050, so the remaining $9,950 is taxed at 32%. In this scenario, you can incur $9,950 in short-term losses to ensure that none of your income is taxed at the higher rate of 32%. Even if only $5,000 of short-term losses can be reaped, you will owe 32% on $4,950 instead of $9,950. No one likes losing money on investments, but at least the losses don’t just have to fade into the ether of the markets.

Consider the tax treatment of your potential capital losses

Capital gains and losses should always be compared before filing your tax return. If you want to learn more about tax planning and stock loss deductions, be sure to check out Benzinga’s library of helpful articles.

Compare tax preparers

Frequently Asked Questions

Can I amortize stock losses?

1

Can I amortize stock losses?

asked

Dan Schmidt

1

Yes, inventory losses can be amortized, provided that short-term and long-term trades are matched. Any amount of capital losses can be deducted against an equal amount of capital gains, but income deductions are limited based on filing status.

Answer link

replied

Benzinga

How much stock loss can you claim on taxes?

1

How much stock loss can you claim on taxes?

asked

Dan Schmidt

1

If you have a total net capital loss, it can be deducted directly from your income, but only up to $1,500 for single filers and $3,000 for married couples. However, capital losses can be carried forward to subsequent years.

Answer link

replied

Benzinga