Tax Rules for Selling Stock Losers

by Michael Dreiser

Stocks are considered capital assets by the Internal Revenue Service, which means they are subject to the capital gains tax. If you sell a stock for a profit you will have to pay capital gains taxes on it, the amount of which depends on how long you held the stock. However, these gains can be offset if you have other stocks that have gone down in value since you purchased them. If you sell a stock at a loss, you can use these losses to offset some or all of your capital gains.

Capital Losses

Shares of stock are considered capital assets of the investor. As such, any gains or losses from the sale of stock are categorized with gains and losses from the sale of other capital assets. As with all capital assets, a capital loss on the sale of stock occurs when the gross selling price of the stock is less than the taxpayer's cost or adjusted basis. The adjusted basis of the stock commonly may include any brokerage commissions paid to buy or sell the stock. For example, if a taxpayer sells shares of a stock for $200, paid $250 for the stock at acquisition, and paid brokerage fees of $10 each to acquire and sell the stock, the capital loss on the stock is $70.

Offset Rules

Before capital losses from the sale of stock can be used to offset other sources of income, taxpayers must first use capital losses to offset all capital gains. If a taxpayer still has a net capital loss after offsetting any capital gain income, the remaining loss can be carried to page 1 of the taxpayer's IRS Form 1040, U.S. Individual Income Tax Return, where it can offset up to $3,000 of income. Any losses beyond $3,000 can be carried forward to future tax periods indefinitely.

Reporting to IRS

The IRS requires taxpayers to report both capital gains and losses from the sale of stock. This IRS mandates that taxpayers describe the stock sold, the date the stock was acquired, the date the stock was sold, the sales price of the stock, and the taxpayer's cost or adjusted basis of the stock. In addition, the IRS requires that taxpayers use Schedule D to segregate between short-term capital gains (assets with a holding period of one year or less) and long-term capital gains (assets with a holding period of more than one year). Long-term capital gains are subject to reduced tax rates.

Investment Strategies

Many taxpayers will attempt to sell stock before losses become too significant to be recaptured over future periods. For example, if a taxpayer suffers a $300,000 capital loss without offsetting capital gains, the loss can only be carried over $3,000 each year. That means it would take the next 100 years carry over all of those losses. Taxpayers with significant long-term capital gains may attempt to avoid stocks with capital losses in the same year of the gains in order to take advantage of the preferential long-term capital gain rates. Many taxpayers also try to sell stocks with capital losses before selling any stocks with any capital gains, thereby taking advantage of the offset values on the losses while deferring taxation on any gains.

About the Author

Michael Dreiser started writing professionally in 2010. He is a certified public accountant with experience working for a large New York City accountancy and expertise in areas ranging from private equity taxation to investment management. He holds a Master of Business Administration in international finance from l’École Nationale des Ponts et Chaussées in Paris.

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