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Stock Losses & How They Affect Taxes

Types

There are two primary types of capital losses that are reportable on an individual's federal income tax. According to the IRS, stocks there were owned for longer than one year and then sold for a loss result in a long-term capital loss. Stocks there were owned for less than one year and then sold for a loss result in a short-term capital loss.

Considerations

A capital loss is only a reportable event on a taxpayer's income tax return once the stock has actually been sold. Stock that has declined in value below the price the individual originally paid for the stock, but still remains in the individual's investment portfolio, does not generate a taxable event and is not reported on her tax return.

Significance

Short-term capital gains are taxable as ordinary income at the individual taxpayer's regular tax rate. Any short-term capital gain may be offset dollar for dollar by any short-term capital loss the taxpayer may have incurred. Long-term capital gains are typically taxed at the much lower long-term capital gains rate. Long-term capital gains may be offset by either long-term or short-term capital losses.

Benefits

As of the 2009 tax year, an individual taxpayer may deduct up to $3,000 of capital losses against other ordinary income during the current tax year. If a taxpayer has capital losses from the sale of stock that exceeds the $3,000 limit, the excess loss may be carried over and deducted the following year.

Warning

If a taxpayer sells stock for a loss, and then purchases shares of the same stock within 30 days of the loss-sale date, the transactions are considered by the IRS to be a wash sale. The loss from this sale may not be immediately reportable on the individual's income tax return. The transaction may create a new cost basis for the stock, which will affect the resulting capital loss or gain once the stock is finally disposed of.

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