If one of the stocks in your portfolio has tanked and you don't expect it to recover, there's a small silver lining to help relieve the financial pain. Sale of a stock at a loss can offset your other capital gains, and the Internal Revenue Service allows taxpayers to deduct net capital losses to offset ordinary income. This effectively grants a tax break to investors who sell enough stock at a loss.
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Things you need
- Schedule D, Capital Gains and Losses tax form
- Form 1040
Find poor-performing stocks in your portfolio. Decide whether accepting a loss as a tax write-off is a more attractive option than holding onto the stocks in hopes they recover.
Sell losing stocks that are better used as tax offsets than investments.
Determine your short-term and long-term capital gains and losses. The IRS considers any investment held for a year or less a short-term loss, and any investment held for more than a year a long-term loss. Start counting on the day after you bought the stock, and include the day you sold it.
Calculate your net capital gain or loss for the year. Subtract your short-term capital loss and any carryover long-term capital loss from the previous year from your long-term capital gains. If the total is negative, you have a net capital loss.
Deduct any net capital loss on your tax return. This loss can be used to reduce your regular income by up to £1,950, or £975 for spouses filing separately.
Fill out a Schedule D: Capital Gains and Losses worksheet. Attach the Schedule D to your Form 1040 when filing your taxes.
Carry over additional capital losses beyond £1,950 into the next year as a potential further offset.
Tips and warnings
- Specify the precise shares you intend to sell at a loss to maximise the tax benefit. If you do not specify, the government assumes you sell the share you bought earliest first.
- Capital losses only apply to investments. Property owned for personal use and sold at a loss, such as a car, does not count as a capital loss.
- You can still express an optimistic investment view even if you sell a certain stock at a loss for tax purposes by buying shares in a similar company or an exchange-traded fund that tracks the sector.
- There's no limit on the amount of losses that carry over into the next year, and you can keep carrying over capital losses year after year, benefiting from a large loss over a long period.
- Making investment decisions based solely on tax concerns can prove costly. Consult with a financial adviser before making any investment decisions.
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