When the IRS is mentioned, people tend to assume this body with how they police paying taxes, but what is often overlooked is how this institution is also in charge of offering tax breaks and other services which can make paying back your taxes significantly easier.
Knowing how to fill out your tax return is important, but also knowing what credits and deductions you can take advantage of will make paying your taxes significantly easier.
These deductions and credits cover a wide variety of different circumstances and situations and there are often a few which you could be eligible for.
One tax deduction which is often overlooked is the ability the IRS allows for being able to deduct some of the stock losses which investors may have run into.
These are often referred to as capital losses, and knowing when they could be useful, you can use them to lower your total taxable income which will potentially lower the amount which you need to pay in taxes which could save you a significant amount annually.
If you are an investor who has made some capital losses in the last tax year, and you want to know how you can deduct these losses in your tax return, keep reading!
How To Write Off Your Stock Losses
The IRS makes it possible for investing taxpayers to be able to deduct their stock losses from their taxable income, especially if the amount which was lost was particularly significant.
There are however, some ground rules which need to be followed to make sure you are properly using this process and making sure you are deducting the correct amount:
Your investment loss will have to have been realized. This means that you will have to have sold off your stock to be able to claim the deduction which you deserve for it.
You will not just be able to write off a loss if the stock is currently less than it was when it was bought, the stock will have to be sold.
You will not be able to deduct your losses against a capital gain. If you have a capital gain, or an investment gain, which has been realized in the same tax year will be able to be offset by a capital loss.
This means that if the capital losses you have made are larger than the gains you have made, you will have a net loss.
Your net loss will be getting offset from your standard income. If you have no capital gains you will be able to utilize your claimed capital losses against your taxable income to reduce the bill you could end up paying for your taxes.
Your maximum capital loss each year will be limited by the IRS. The maximum capital net loss you can claim annually is limited to $3000.
This counts for both individuals as well as people who are married filing together. If you are married and filing separately you will have an even more strictly limited maximum capital loss of $1500.
In spite of this limit, the amount of capital loss which you do not claim will be rolled over to the next year.
This means that if you do not deduct the maximum $3000 of capital losses, you will be able to claim this loss in the future and use it to offset any of your future potential gains.
This also has the benefit of not expiring as the losses will not stop rolling over.
Per the previous point, you will be able to reduce the amount of taxable gains you have made if you have gross losses to utilize to offset them.
The last day in which it is possible to realize your loss is the final trading day of any calendar year. This is usually 31st of December, but it can be different.
These changes in your stocks, the gains as well as the losses, will be entered into Schedule D of the annual tax return.
As well as this, there will be a worksheet included which will be used to help you calculator your net, being either a gain or a loss.
This section can be complicated depending on the number of gains or losses you have, so it is recommended to speak to a professional if you do not trust yourself to be able to complete this stage of the process.
It is important to remember that you should use your short-term losses to first offset your short-term gains and to then follow this same pattern with your long-term gains and losses.
Once your losses have potentially fully exceeded your gains in one category, you can then use them on the other type.
Your short term gains and losses are those held for less than a year while the long term are those held longer than this.
These are sometimes taxed at different rates which is why it is worth keeping them separate. Generally speaking, your long-term gains will be treated better than your short term gains.
If you are experienced or want to utilize a tax professional, you can strategically plan when to realize losses to make sure to take advantage of their offsetting capabilities as this way you could better deduct more from your taxable income.
This process is called; tax-loss harvesting and when properly utilized can be used to save significant portions.
Knowing how to properly deduct your stock losses can save you a lot of money when it comes to paying your final tax bill and knowing when to realize these losses can be the difference between good savings and amazing savings.
It is worth noting that if a company has become bankrupt the way of deducting these stocks is slightly different, and you will need proper documentation of your losses.
There are limits to this system, but being able to deduct $3000 from your taxable income is useful if you are unlucky with your capital losses.