Tax Treatment of Long-Term Stock Capital Losses

by Jeff Franco

The tax law classifies the stocks you own as capital assets, and they are subject to the capital gains tax rules. Since the Internal Revenue Service treats your stocks as investment property, selling them at a loss allows you to claim a deduction each tax year, regardless of whether your holding period is short or long-term. However, the deduction is only available on the excess capital loss that remains after offsetting all capital gains with it.

Stock Tax Basis

When you initially purchase shares of stock, it's important that you retain documentation that reports the acquisition price for each stock purchase, as well as any brokerage fees. The reason is because your tax basis in the stocks is equal to the market price you pay for each share plus the commissions. However, many brokerage firms will provide you with an annual statement before you prepare your tax return.

Capital Loss Transaction

Your loss for each transaction is equal to the difference between your tax basis in the shares and the market price you sell them for. To illustrate, assume you purchased 100 shares of a stock for $2,000 at $20 per share, and the broker fees are $50 per trade. If you sell the shares two years later at a price of $15 per share, your tax basis in the shares is $2,100 and the sale proceeds are $1,500. The result is a $600 long-term capital loss.

Long or Short

The tax implications of a stock sale are the same regardless of whether you classify the loss as short or long-term. However, for purposes of reporting the capital loss on the Schedule D form, you must evaluate the appropriate category for your stock transactions. For the stocks you sell after one year or less after their purchase, the resulting loss is short-term. However, if you own the stocks for more than one year, you report a long-term capital loss.

Investment Property Deductions

The IRS allows you to deduct some of your stock losses from the ordinary income you report on your return, such as your employment and self-employment income, bank interest and dividends. However, you can only deduct up to $3,000 in each tax year of the capital loss that remains after offsetting all of your capital gains with it. And if your stock losses exceed your capital gains by more than $3,000, you can carry over the excess losses to future tax years.

About the Author

Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.