Capital losses occur when you sell stocks for less than your purchase amount. Nobody likes incurring such losses, but there is one consolation prize: a tax write-off. Capital losses may be applied to capital gains to defray any taxes incurred. If your capital losses exceed your capital gains, then you may deduct up to $3,000 from your adjusted income to reduce your tax burden further. Although you cannot deduct more than $3,000 from your income, you can carryover any remaining losses to your next year's taxes and deduct them at that time.
1. Calculate the basis for the stock. This is the cost of the stock, plus any applicable brokerage commissions. As an example, if you purchased 200 shares of company ABC for $50 per share, and paid a $25 broker fee, then your basis is $10,025.
2. Calculate the amount realized in the sale. This is the total amount generated from the sale, minus any brokerage commissions. In the example, if the stock sank to $20 per share, and you paid another $25 commission, your realized amount is $3,975.
3. Subtract the realized amount from the cost basis to calculate your capital loss. In the example, you would have realized a capital loss of $6,050.
4. Subtract this figure from any capital gains. If you end up with a positive number, then the entire amount is deductible from your capital gains. If you end up with a negative number, then you have leftover deductions, which may be applied to income. In the example, if you had $1,500 in capital gains, subtracting $6,050 from $1,500 produces -$4,550. This means your entire capital gain is erased and you have carryover capital losses to apply to income.
5. Compare this figure to $3,000. If the absolute value of this number is less than $3,000, then you can deduct the entire amount from your income. If it is greater than $3,000, then you can deduct $3,000 from income and carryover any excess to the next year. In the example, you could deduct $3,000 from income and have $1,550 in capital losses that may apply to the next year.