Tax Write-Offs for Stock Losses

by Alexis Lawrence

The tax implications of stock purchases, stock ownership and stock sales vary widely, depending upon increases and decreases in the stock's value. If you profit from a stock, whether through dividends or selling it, you must pay taxes on the profits. However, if you experience stock losses during a tax year, you can write the capital loss off on your taxes.

Why Sell

When a stock goes down in value, it may seem like a good idea to hold onto the stock in case of a rebound. But, in some cases, it may be in your best interest to sell. The stock may continue to lose value if you hang onto it, and it may be better to cut your losses and get out while it still has some value. If you make a lot of money during a year, selling a stock at a loss can also help offset your capital gains taxes.

Stock Loss on Taxes

If you have an overall loss on stocks during the tax year, you can declare the stock loss on your tax return. If you sell three stocks during the year, for instance, one at a $200 profit, one at a $400 profit and one for a $1,000 loss, you can declare the $400 net loss on the stocks for tax purposes. If you have an overall gain, you have to declare the total profit as a gain.

Filing Taxes

When you have a stock loss to write off on a tax return, you must complete Schedule D of your annual tax return form, Form 1040. This financial loss on stock is listed as a capital loss, which offsets your income for the year, and either reduces the taxes that you owe or increases the amount of your return.

Excess Loss

Although any profits earned from selling stock during a tax year, or capital gains, must be declared at full value, you cannot necessarily declare the full value of stock losses. Unlike capital gains, capital losses have a yearly limit of $3,000. If you have more than a $3,000 stock loss during the year, that loss does carry over though. You can declare $3,000 the first year and declare the remainder, up to $3,000, in a subsequent year until you declare the entire amount of the loss.