Although most of us enjoyed a profitable market year in 2020, many of our gains have been significantly lost within the first month of the new trading year. Despite all of the red that may run through your portfolio, there are certainly benefits to be had with your stock losses – via Uncle Sam.
Benefits of Capital Losses
When you sell your investment lower than your original purchase price, then you qualify for a capital loss write-off. Even the expenses you incurred from the sale can be written off, adding more value to your capital loss. However, the key in obtaining tax benefits from capital losses is to SELL them. Although your balance sheet may be in the red, if you still are holding onto your investments, then you cannot reap the tax benefits of capital losses.
One of the most effective deductions for investors is the capital loss write-off. Your taxable income is reduced by capital losses, which of course lowers your tax obligations – and may drop you into a lower, more favorable tax bracket.
Factors to consider
However, like any interaction with the IRS, there are many complications and factors to consider:
- To capitalize upon the most tax benefits, you would ideally take your capital losses on a trading year when your portfolio experiences either no growth or only short-term growth. In this type of year, taking a capital loss will allow you to reduce your standard income tax rate – and potentially your bracket.
- Keep in mind that the IRS implemented the “wash” sale rule – which means that you cannot sell your stock, take capital loss benefits, and then turn around within 30 days to purchase a significantly similar replacement stock. To reap the benefits of the capital loss tax break, wait more than 30 days before repurchasing that symbol.
How to File For Your Capital Losess
In your Schedule D of your income tax forms, you will have to specify whether your capital losses stem from short-term or long-term investing.
- You will have to file your short-term investments’ capital gains and losses, calculating whether you come out positive or negative for the year. You will do the same for your long-term investments.
- Adding together the net value between your short-term and long-term investment calculations, you can determine whether or not your losses will offset your gains. Your losses in short-term investments, for example, and offset your gains in long-term investments, and vice-versa. You only pay taxes on the final net value.
- If you do have capital losses, then you can offset $3,000 as a deduction from your other sources of income. If you have more than $3,000 in capital losses, then you can carry the amount over $3,000 to deductions for next year’s taxes.
Although the market may have left many portfolios in the red, utilizing Uncle Sam’s tax benefits can at least help alleviate the burden – keeping more money in your pockets to rebuild your portfolio.