Stock Losses? Don't Worry - Deduct Them

When you invest in a stock, you certainly don’t hope to lose money. Unfortunately, though, losses do occur from time to time, and it’s important to understand that you don’t have to keep paying the price for those losses, at least not when it comes to your tax bill!

Keep in mind, though, that deducting losses isn’t as simple as you might think. There’s a right way- actually a handful of right ways- to do it, and you want to make sure you choose the one that’s going to benefit you the most in the long run. That’s where having a tax advisor and/or an investment advisor can really come in handy!     

Capital Losses

First things first, it’s important to understand what kind of losses stock market losses are. Technically, they are capital losses or capital gains losses. You, as an investor, are only responsible for paying on “realized” capital gains or losses, which means you have to sell your stock for it to truly count as a loss. In other words, just losing money on it isn’t enough. If you don’t sell a stock, no matter how badly it performed, it can’t create a tax deduction, plain and simple.

You do want to make sure, however, that you are not selling your stock for a profit. If you do so, the money you make will be considered taxable income, which will defeat the purpose and benefit of counting your losses to save on taxes.

Figuring Out Your Loss Amount

The loss amount is not just the money you lost or the money you paid for the stock. Instead, it’s the number of shares sold times the per share adjusted cost basis minus the total sale price. If that sounds confusing, it can be! That’s why having a professional to help you do the figuring is really necessary.

Also bear in mind that if there was a stock split while the stock was under your ownership, your costs basis will need to be adjusted accordingly.

Required Forms

Once all the math is done, you’ll need to fill out the appropriate IRS forms to avoid being taxed for lost stocks. The appropriate form is Form 8949 and Schedule D. Your losses will count as short-term or long-term capital losses, based on various factors.

Again, having a professional to help you navigate this process and to choose the right way to handle your stock losses will lead to the most benefits for you. While you can just follow these basic instructions, it’s always smarter to work with someone who will look at your circumstances as unique and come up with the best “plan of attack” for your particular needs. Also, the right professional assistance can help you to avoid stock losses altogether (or at least mostly!) in the future.

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• Harvesting Losses: One Benefit Of A Correction (forbes.com)