How to Deduct Stock Losses from Your Taxes

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Contributor, Benzinga
February 15, 2021

Not looking forward to taxes this year? Understandable. 

You can use a number of tax deductions to offset any income you’ve earned this year. If you got caught up trading stocks and you sustained a capital loss, you can deduct this loss when filing your state and federal taxes. Learn how to start and ensure that you deduct every penny possible. 

Stock Loss vs. Capital Loss

The first important distinction that you need to understand is the difference between a stock losing value and a capital gain loss. In order to deduct losses from your taxes, you must have a realized capital loss resulting from selling a stock at a lower price than you bought it. A realized capital loss is different from a stock losing value because a realized capital loss represents a complete transaction. If you took a loss on an investment that you haven’t sold yet, you cannot claim this as a stock loss on your taxes.

Let’s take a look at 2 examples to illustrate this point. 

  • Imagine that you purchased 100 shares of Company A’s stock at a price of $100 a share for a total investment of $10,000. A month later, shares of Company A are worth only $80 a share. Not wanting to lose any more money, you sell all 100 shares of stock at a price of $80 a share. This leaves you with $8,000 left in cash and a $2,000 loss. In this case, you could deduct this $2,000 loss from your taxes because it represents a realized $2,000 capital loss.
  • Let’s say you’re in the same scenario as above, but you don’t decide to sell your shares. Despite the fact that your shares have decreased in value, you cannot deduct this from your taxes because you have not yet realized a concrete loss. The stock could conceivably rise in value again, which means that you haven’t realized a loss. Some investors strategically try to time their capital gains and losses to maximize their deductions through a process called tax-loss harvesting.

In most cases, you can only deduct the losses from your disadvantageous trade. In the above example, you can only deduct $2,000 in losses because this is the amount of money you lost. You cannot deduct the entirety of your $10,000 initial investment because you recouped a large portion of it when you sold your investment. If you invested in a company that went totally bankrupt and liquidated its remaining shares, you can claim a total loss up to the annual limit.

According to current IRS rules, you can deduct up to $3,000 in capital gains losses each year as a single filer. If you saw an overall capital gain in your stock account, you can take your deduction from your capital gains. If you saw an overall loss, you can deduct this from your taxable income, which leaves you with less money that’s taxed when calculating your tax bracket. If you had more than $3,000, no need to worry about lost deductions — you can roll over losses to the next year.

In the next section, we’ll explain how to deduct realized capital losses. Keep in mind that this process generally only applies to taxable brokerage accounts. Investing accounts with special deposit and withdrawal rules (for example, a traditional IRA or a 401(k) account) typically come with their own rules and restrictions. 

How to Write Off Your Stock Loss

Deducting stock losses doesn’t need to challenge or stress you out. Learn the basic steps you’ll go through to deduct realized capital gains losses when filing your tax return.  

Step 1: Gather what you need.

You’ll need a few important documents before you can deduct stock losses from your tax return:

  • Brokerage 1099: Every year, your broker will issue you a 1099 form before tax season. This 1099 form includes information on all of the trades you’ve made throughout the year and your total net loss or income. Download your 1099 from your broker and read through it to see if you have losses that can be deducted.
  • Form 8949: IRS Form 8949, the Sales and Other Dispositions of Capital Assets form, details all of the trades you’ve made that resulted in capital losses or gains. You can download a copy of Form 8949 from the IRS here.
  • Schedule D: IRS Schedule D, the Capital Gains and Losses form, is another form that you must fill out in order to deduct stock losses from your taxes. You can download a copy of Schedule D from the IRS here.

You’ll attach both of these forms to your tax return if you choose to file a physical return. 

Step 2: Complete Form 8949.

The first form you’ll need to complete is Form 8949. This form details all of your stock transactions that you’ve made throughout the year. You can find all of this information neatly arranged on your brokerage 1099 form, along with your net gain or loss for the year. If you use a tax preparation software, you may be able to import this information directly from your 1099.  

Step 3: Complete Schedule D. 

After you’ve completed Form 8949, you can use this information to complete Schedule D. Schedule D is a summary of the information you’ve already written down on Form 8949, so it’s recommended that you complete this before working on Schedule D. After both forms have been completed, you can attach both to Form 1040, 1040-SR or 1040-NR depending on how you’re filing. Be sure that your total deduction doesn’t equal more than $3,000, as this is the annual limit for individual filers. 

Best Online Tax Preparation Software

Using tax preparation software can make locating your deductions and filing your taxes much less time consuming. If you’re still searching for the right software to prepare this year’s tax return, consider a few of our favorite partner companies below.

Get Your Taxes Ready

Doing your taxes as soon as possible is always a great idea, and keeping yourself organized throughout the year can help make finishing your taxes easier. After you finish filing this year, you may want to calculate your remaining capital losses if they exceed $3,000. If you have more losses than you can deduct this year, you can roll additional losses to next year’s return.