How to Report Losses on Your Investments on Your Tax Return

Stack of coins in front of financial graph sloping downInvestment losses can be a complex aspect of tax reporting, but understanding how to properly account for them on your tax return can save you money and help you manage your overall tax liability. Keep reading to learn how to report losses on your investments when you file your tax return.

Understanding Capital Losses

One of the first steps in properly reporting these losses is understanding what capital losses are and how to calculate them. There are a few key factors in this area that you’ll need to know about in order to do this. The first is understanding the differences between short-term and long-term capital losses.

Capital losses occur when you sell an investment for less than you paid for it. These losses are classified as either short-term or long-term:

  • Short-term capital losses apply to investments held for one year or less.
  • Long-term capital losses apply to investments held for more than one year.

The classification of your loss affects how it offsets your gains and influences your tax liability. To calculate your capital losses, you need to determine the basis of your investment (typically the purchase price plus any additional costs, such as broker fees) and compare it to the sale price. The difference between these amounts represents your capital loss.

Reporting Capital Losses

Reporting capital losses begins with Form 8949, "Sales and Other Dispositions of Capital Assets." You must list each investment sale on this form, including details such as the date of acquisition, date of sale, cost basis, and sale price.

Once you have completed Form 8949, transfer the totals to Schedule D, "Capital Gains and Losses." Schedule D summarizes your total capital gains and losses, both short-term and long-term, and helps determine your overall capital loss for the tax year.

Offsetting Gains with Losses

The IRS allows you to use capital losses to offset capital gains. This process is known as "netting." Here’s how it works:

  1. Net your short-term gains and losses: Subtract your short-term capital losses from your short-term capital gains.
  2. Net your long-term gains and losses: Subtract your long-term capital losses from your long-term capital gains.
  3. Combine the results: If the results of steps 1 and 2 are both gains or both losses, combine them to get your net capital gain or loss. If one is a gain and the other is a loss, net them against each other to determine your overall net capital gain or loss.

Carrying Over Excess Losses

If your capital losses exceed your capital gains, you can use the remaining loss to offset up to $3,000 of other income ($1,500 if married filing separately). Any remaining losses can be carried forward to future tax years indefinitely, continuing to offset gains or up to $3,000 of other income each year until the losses are exhausted.

Special Considerations for Investment Losses

While the above covers basic capital gains and losses, investing is often much more complex than that. Here are some special considerations to keep in mind that are likely to impact how you report your losses:

  1. Wash Sale Rule: One critical rule to be aware of is the "wash sale" rule. This IRS regulation disallows a capital loss deduction if you repurchase the same or substantially identical security within 30 days before or after the sale. If a wash sale occurs, the disallowed loss is added to the cost basis of the newly purchased securities, potentially deferring the loss deduction until the new securities are sold.
  2. Losses from Worthless Securities: If an investment becomes completely worthless, you can still claim a capital loss. The IRS considers the loss to have occurred on the last day of the tax year in which the investment became worthless. This type of loss is reported on Form 8949 and Schedule D like other capital losses.
  3. Non-Deductible Losses: Certain investment losses are non-deductible. For example, losses from the sale of personal-use property, such as your home or car, are not deductible. Additionally, losses from securities that you donate to charity or give as a gift cannot be deducted.

Seeking Professional Assistance

Given the complexities involved in reporting investment losses, seeking the guidance of a professional CPA can be highly beneficial. A CPA can help ensure that all relevant details are accurately reported, maximizing your potential tax benefits while ensuring compliance with IRS regulations. When you work with one of the experts here at Demian & Company CPAs, you’ll reap a number of important benefits:

  • Expertise: CPAs have extensive knowledge of tax laws and regulations, ensuring that your tax return is accurate and complete.
  • Strategic Planning: Professionals can provide strategic advice on how to manage your investments and tax situation effectively.
  • Audit Support: In the event of an IRS audit, a CPA can represent you and provide necessary documentation and explanations.

Properly reporting investment losses on your tax return is crucial for managing your tax liability and maximizing your financial position. For personalized advice and assistance, consider consulting with an experienced CPA to ensure your tax return accurately reflects your investment activities and optimizes your financial outcomes. Contact Demian & Company CPAs today to schedule a consultation.