The stock market can be a risky investment choice. If you are one of the millions of Americans who has lost money on a stock, you may be wondering how best to handle that loss. You can ride out the stock market and hope your investment dollars return, or you can sell your stocks and claim the loss.
A capital loss occurs when you sell a stock investment for less money than you paid for it. If you purchase stock at $20 per share and then sell the stock six months later at $10 per share, you have a capital loss of $10 multiplied by the number of shares sold. A capital gain is just the opposite and occurs when you sell a stock for more money than the purchase price. Capital gains and losses are categorized into short-term losses and gains resulting from stocks held one year or less, and long-term losses and gains on stocks held longer than one year.
According to Internal Revenue Service Publication 17, you are required to report any capital gains or losses accrued through the sale or trade of commodities, real estate and stocks or bonds. Typically, any transactions conducted through a broker are reported on a Form 1099 which the broker sends to you. You must report capital gains and losses on Schedule D of your income tax Form 1040 even if you did not receive a Form 1099 for these transactions.
Claiming a Loss
If you do sell your stocks at a loss, you can recoup a portion of that loss as a deduction on your taxes. A capital loss claim can help offset the taxes you might pay on capital gains from another investment that performed well, notes financial website Free Money Finance. Alternatively, you can utilize capital losses on stock investments to deduct a total of $3,000 of net capital losses from your income for each tax year.
It's important to note that you must actually sell your stocks at a financial loss before you can take a tax deduction for that loss. Many investors maintain a stock portfolio which periodically loses value due to dips in the stock market. If you retain your stocks during those drops, however, you cannot claim a loss even if your portfolio value is greatly diminished.
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