Capital Loss Deduction: Tax Season Basics for Investors

A capital loss deduction can offset capital gains and reduce tax payable, although there are important factors to consider. Let’s look at some basic questions about capital losses for taxpayers.



5 minute read

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Key points to remember

  • Capital losses arise from the sale (at a loss) of a capital asset such as real estate, mutual funds or stocks
  • Depending on their filing status, taxpayers can deduct up to $3,000 of a net capital loss from salary and other income
  • Short-term and long-term assets are treated differently

Tax season can be an annual exercise in keeping score financially. It’s a time when investors are counting their winners and losers for the ultimate commissionerthe Internal Revenue Service (IRS). And that’s where capital gains and losses come in. Many investors are surely familiar with capital gains, but what is a capital loss? Capital losses are just as important to understand and account for at tax time.

A capital loss generally arises from a financial loss resulting from the sale of a capital asset such as real estate, mutual funds, bonds or stocks. A capital loss deduction can offset capital gains and reduce tax payable, although there are limitations and important factors to consider, such as short or long term losses, sales ” fictitious, etc.

Let’s look at some basic questions about capital losses for taxpayers.

What defines capital property that can give rise to a capital loss deduction?

According to the IRS, many of the things people own and use for personal or investment purposes can be considered capital property. Examples include a house or stocks and bonds. Inherited property can also be capital property.

When an asset is sold, a capital gain or loss is determined by calculating the difference between the adjusted “base” (usually what the owner paid for the asset) and the sale price. If you received the property as a gift or inheritance, different ground rules apply.

How do I know if I can claim a capital loss deduction?

Know your limits and deadlines. Investment losses are first used to offset capital gains of the same type, meaning that short-term losses are first deducted from short-term gains, and long-term losses are deducted from future gains. long term. Net losses of either type can then be deducted from the other type of gain.

Here is an example of TurboTax Intuit: If you have a short-term loss of $2,000 and a short-term gain of $1,000 in a calendar year, the net short-term loss of $1,000 can be deducted from your net long-term gain (assuming you have one).

If you have an aggregate net capital loss for the year, you can deduct up to $3,000 of that loss from other types of income, including your salary and interest income. Any excess net capital loss can be carried forward to be applied against capital gains and up to $3,000 of other types of income. (For married individuals filing separately, the annual net capital loss deduction limit is only $1,500.)

What is the difference between a short-term capital loss and a long-term capital loss?

Short-term losses result from the sale of assets held for one year or less; long-term losses arise from the sale of assets held for more than one year. Short-term gains are taxed at your top tax rate, which was 37% in 2022, while most long-term gains are taxed at zero, 15% or 20% for 2022.

If the property is a gift or an inheritance, certain exceptions apply. To determine how long you held the asset, you typically count from the day after you acquired the asset to the day you disposed of it, according to IRS.gov.

How does the fictitious sale rule work?

Suppose you have a capital loss that you would like to declare for tax purposes, but you still see long-term benefits and don’t really want to exit your position. So you sell the asset at the end of the year and buy it back right after the New Year’s Eve, right? Bad. It’s a sham sale, and IRS rules prohibit you from claiming a deduction.

According to IRS.gov, a wash sale occurs when you sell or trade stocks or securities at a loss, and within 30 days before or after the sale, you do one of the following:

  • Buy “substantially identical” stocks or securities
  • Acquiring substantially identical shares or securities in a fully taxable transaction
  • Acquiring a contract or option to purchase substantially identical shares or securities
  • Acquire substantially identical shares for your Individual Retirement Account (IRA) or Roth IRA

For example, suppose an investor buys 100 shares of a stock for $1,000, sells those shares for $750, and within 30 days of the sale buys 100 shares of the same stock for $800. Since the investor purchased “substantially identical” shares, the $250 loss is not tax deductible. However, the investor can add this unauthorized loss ($250) to the cost of the new stock and establish the basis at $1,050.

If you buy and sell shares at a loss within 30 days, but do not buy or acquire substantially identical shares or securities, you suffer a short-term capital loss as opposed to a wash sale.

What IRS forms do I need to report capital losses or capital gains?

Taxpayers must generally file Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D, Capital Gains and Losses with their tax returns to report capital gains and losses.

Do you have other questions about the capital loss deduction? Seek advice from a professional tax expert.

TD Ameritrade does not provide tax advice. We suggest you consult a tax planning professional about your personal situation..

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