Claiming Capital Losses on Your Tax Return

A capital losses happens when you sell an investment asset—such as a stock, bond, or mutual fund—and you lose money. The sale price is less than what you paid to acquire it. Capital losses on the sale of investment property are tax-deductible; losses resulting from the sale of personal property are not.

There are several rules that apply when claiming capital losses on your taxes. Learn what they are and whether they apply to your situation.

How Do I Use Capital Losses to Offset Capital Gains?

If you have both capital gains and capital losses, you can use the losses to offset the gains. You would subtract the value of your losses from the value of your gains. This would effectively become a deduction that can lower your taxable income.

Suppose you sold two investments last year. You bought one stock for $850, which you later sold for $1,000. That would mean you made a profit of $150. You also bought stock in another company at $800, which you later sold for $750. That would mean you lost $50 on the second investment.

The loss on the second transaction can be subtracted from your profit on the first transaction, offsetting it. Your taxable income from the two transactions works out to:

$150 - $50 = $100

The $50 loss on the second investment sale has reduced or offset the profit on the sale of the first investment. 

What Is the Holding Period for Capital Losses and Gains?

Handling capital losses and gains can be a little complicated. That's because income from capital gains can be taxed at different rates. The tax rate depends on how long you have held the asset.

Assets that you own for one year or less are considered short-term holdings. Gains from short-term investments are taxed at the same rate as your ordinary income.

You would have a long-term holding if you were to own the shares for more than one year. Gains from long-term investments are taxed at special capital gains tax rates of 0%, 15%, or 20%. The 20% rate affects only the highest earners.

When using capital losses to offset capital gains, you have to group your losses and gains by their holding period. Short-term capital losses can only be used to offset short-term capital gains. Long-term capital losses can only be used to offset long-term capital gains.

Now suppose that you had four transactions ending in the current year. Two have short-term holding periods, and the other two have long-term holding periods. The situation would break down like this:

What Can I Do With Overall Capital Losses?

Sometimes, your short-term gains or losses plus your long-term gains or losses result in a loss. When that happens, you have an overall loss that can be deducted against your other income. There are limits on how much of a loss you can claim, though, and when you can do so. 

You can use your overall capital losses to reduce your taxable income by $3,000 or the amount shown on line 16 of Schedule D, whichever is lower. If your losses are more than this amount, you can carry over the remaining loss to the next tax year or several years. For example, if you have $15,000 in losses, you can reduce your taxable income by $3,000 per year for the next five years.

This $3,000 limit applies to taxpayers who use the single, head of household, married filing jointly, or qualifying widow/widower filing statuses. Married people filing separate returns are limited to $1,500 per person on net capital losses.

How Do I File and Claim Losses?

Claiming capital losses requires filing IRS Form 8949, "Sales and Other Dispositions of Capital Assets," with your tax return. You will also need to file Schedule D, "Capital Gains and Losses" with your Form 1040.

What Is the Wash Sale Rule?

Losses are suspended under what's known as the "wash sale rule" if you buy "substantially identical" stock or securities within 30 days before or after you sell a stock at a loss. This rule prevents you from claiming the entire loss amount. 

Suppose you were to sell your stock in XYZ company at a loss on March 31. You would have a wash sale situation if you were to buy the stock in XYZ company 30 days before this date, or the same stock up until 30 days after this date.

In this example, your wash sale period runs from March 1st (30 days before) to April 30 (30 days after). You would not be able to claim the full amount of the loss from the March 31 sale if you were to buy XYZ stock at any point during this time frame. You would have to take the loss amount and add it to your cost basis in the new shares you purchased instead. 

It's sometimes possible to reinvest in different assets within the same sector, however, particularly when they have a different ticker symbol. The wash sale rule applies to substantially identical assets. 

If you are thinking about buying and selling similar stocks within a short period of time, or aren't sure whether your investment actions would be regulated by the wash sale rule, speak to a financial advisor before making any decisions.