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Claim A Stock Loss to Save on Your Taxes
Investment losses can be used as a tax deduction on your tax return; however, a loss on stock cannot be realized unless you sell the shares by the end of the year.
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Example: If you acquired stock at $15 a share, but the company merged with another company and the stock is now worth $10 a share, you can deduct the loss on your taxes only if you sell the shares. If you purchased 1,000 shares, your initial basis in the stock would be $15,000. If you sell all the shares at their current value of $10,000, you will recognize a $5,000 loss (ignoring any transactional costs). This means you can offset up to $5,000 of other capital gains recognized during the tax year. If you don’t have any capital gains this year, the $5,000 loss offsets up to $3,000 of ordinary income. You can then carry the excess loss of $2,000 over to the next year.
Capital gains and losses are either short-term (stock was owned for one year or less) or long-term (stock was owned for more than one year). Capital losses offset capital gains of the same type, then capital gains of the other type, and then other income -- i.e. a short-term loss first offsets a short-term gain for the year, then remaining short-term loss would then be used to offset long-term gains; and if your loss from the sale of stock was greater than the total of your other combined long- and short-term capital gains, then you can use up to $3,000 in net capital losses as a deduction against other income. The remaining loss can be carried forward to future years to reduce your taxable income for that year. The loss can be used against capital gains and up to $3,000 of other income each year until the entire loss has been utilized in its entirety.
Note: If you repurchase shares that you sold at a loss within 30 days, then the transaction is called a "wash sale," and the loss will be suspended or deferred for tax purposes.