Tax Deductions on Stock Losses

The Income Tax Code allows a taxpayer to receive ainvestment fails, all losses can be tallied together, up to
benefit from a loss on capital investment. Taxpayersa prescribed limit. The losses can be used to offset
can reduce their taxable income by the amount ofgains in other investments.
their loss or $3000, whichever is smaller. MarriedIRAs and other retirement plans are excluded from
couples filing separately can claim up to $1500 each.these benefits, as they are already tax advantaged.
For example, let's say that our investor has $40,000 inThese particular deductions apply only to taxable
income and $10,000 in realized gains from the sale ofaccounts.
successful investments. He also has $5,000 in losses,Investors will want to become skilled at managing
but chooses not to sell these assets. Therefore, hiswinning trades against losing ones, as great benefits
taxable income is $50,000. Now, if our investor chosecan be achieved through using these deductions
to sell his losing assets and claim the deduction, hestrategically. Pairing winners against losers will lower
could claim up to $3000 and reduce his taxable incomeyour taxable income on successful investments and
to $47,000. Furthermore, he could "bank" his remainingallow you to get rid of poorly performing assets. If you
$2000 in losses and apply it to the next year's taxesaccumulate more losses than the prescribed limit, you
as a tax loss carry-forward and already be reducingcan "bank' those losses against future income or
his taxable income for that year.capital gains.
Having the ability to deduct these losses allows anIt should be noted that you can only offset
investor to eliminate stocks with bad returns or littleinvestments of the same duration. Therefore, you
hope of realizing expectations. The tax benefit is takenmust use short-term losses to offset short-term gains
in the year that the asset is sold. If more than oneand long-term losses to offset long-term gains.