How Much of a Stock Loss Can I Put Against an Ordinary Income?
Original post by Jonathan Langsdorf of Demand Media
The most common tax use for stock market losses is to offset gains from stock market gains. Losses from investments, known as capital losses, can be used to reduce taxable capital gains and other forms of income. The tax code lists how stock market losses must be used to reduce your taxable income.
Capital Gains and Losses
Profits and losses from stock investments are classified as capital gains or losses for tax purposes. A capital gain or loss does not become a tax-reportable event until the stock is sold and the gain or loss is realized. Both capital gains and losses are divided into short- and long-term categories. Long-term capital gains or losses are from stocks owned for more than one year. If the stock was owned for one year or less, the result is a short-term loss or gain.
Netting Out Losses
The tax rules require capital losses, such as a loss from the sale of stock, to first be used to reduce capital gains. The type of losses -- long or short term -- are first used against the same type of gains. Excess losses are then used against the other type of capital gains. If the total losses from your stock investments exceed the total reportable capital gains, you have a net capital loss. At this point the excess net capital losses can be used as a write-off against other income.
Other Income Limits
If you have excess capital losses for the sale of stock, you can use those losses as a deduction against other income, such as interest earnings or wages. The IRS limits the use of capital losses against other income to $3,000 for any single tax year. If your excess stock losses exceed $3,000, the unused losses can be carried forward to future years for offsetting capital gains or other income.
Timing Stock Sales
The rules to use the loss from the sale of stock as a tax deduction force you to consider the timing of your stock sale. If you want to use the tax loss against your other income, you should make sure you have no capital gains for the year. On the other side, if you have a very large loss on a stock, the $3,000 limit may not allow you to use much of the loss for the current year and require you to spread the deduction over several years. If you have other stocks to sell for gains, selling them in the current year may make sense for income tax purposes.
- Internal Revenue Service; Ten Important Facts About Capital Gains and Losses; February 2011
- Fairmark; Capital Gains and Losses 101; Kaye A. Thomas
About the Author
Jonathan Langsdorf has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Langsdorf has a bachelor's degree in mathematics from the U.S. Air Force Academy.