When you sell stock, it can either increase or decrease the amount of your taxable income, depending upon whether you realized a profit, or lost money from the sale. However, if you make a profit from the sale of stock, you generally don't receive a tax deduction.
Losses from Stock
Losses from stocks occur when you sell the shares at a lower price you originally purchased them. If this happens, the lost money is considered a capital loss, and you can declare the stock as such on your tax return. When you figure this number, you also can include the brokerage fees that you paid to sell the stock as part of the loss.
Capital losses, including the money lost on stocks, have a yearly limit of $3,000. The fact that you can't declare a loss of more than $3,000 all in one year doesn't mean that you can't declare the entire loss though. Any amount of loss above the $3,000 limit can be carried over to the following tax year.
Declaring Capital Loss
To declare capital losses on your income tax return, you must fill out Schedule D of standard tax return Form 1040. Stock losses are listed separately and if you lost less than $3,000 you can list all losses for that year. If you lost more than $3,000, list your losses totaling $3,000 and keep your receipts for the following tax year. The next year, fill out Schedule D again and list any outstanding loss. If you lose $4,000, for instance, declare $3,000 that tax year and the other $1,000 on the following year's return.
Profiting from Stock
If you profit from stock, you do not receive any tax deductions upon the sale of the stock. Instead, the profit from the stock is considered a capital gain for tax purposes, and it increases the amount of taxes you owe. Like a capital loss, you report a capital gain on Schedule D of your income tax return. Unlike capital loss, no limit is placed on the amount of capital gains that you must declare on your tax return. Whatever profit you make from stock becomes taxable income, although these gains are taxed at a lower rate than money earned from employment if held for at least one year.