Identification

The Internal Revenue Service (IRS) uses the term capital gains and losses for profits and losses from investments. Capital gains and losses do not become a taxable event until the investment is sold and the gain or loss is realized. If an investor want to use the loss from an investment as a tax deduction the investment must be sold at a loss before the end of the year.

Significance

Investment losses are used to offset investment gains for tax purposes. The IRS rules state that short-term losses must be used against short-term gains and long-term losses against long-term gains. Any excess capital gains of one category can be used against capital losses of the other category. For example, an investor has $20,000 in short-term losses and $15,000 in short-term gains. $15,000 of the short-term losses must be used against the short-term losses and the balance of $5,000 can be used to offset long-term gains. Any capital losses in excess of all capital gains can be used to reduce other income to a maximum of $3,000.

Considerations

Losses from investments must be used in the order specified by the IRS as tax deductions. Long-term capital gains are taxed at a much lower rate than short-term gains or ordinary income. Some tax planning before selling investments at a loss can help maximize the use of the deductions. Loss deductions save the most in income tax if they are used against short-term gains or other income. If total capital losses exceed capital gains by more than the $3,000 allowed as a deduction against ordinary income, the balance can be used in future tax years.

Warning

References

More Like This

How to Claim Investment Loss on an IRS Form

How do I Write Off a Business Investment Loss on Taxes?

What Is the Maximum Allowable Federal Tax Deduction for Losses in the Stock Market?

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