How to Claim a Stock Loss on Taxes

Daniel Penzing
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How To Report Stock Losses on Tax Forms

If you have shares of stock in an investment, you can claim the loss on your tax return if the stock loses value. Stock loss claims, however, can only be used in certain instances. You may be able to report stock losses on your taxes if the following situations apply:

You purchased shares of stock in the prior year but you held them for less than a year.

You purchased shares of stock in the prior year but they changed hands at any point in the year. In this case, however, you need to report the transactions of the stock trade when they happened.

The company issued you a stock dividend that you had to return.

You own convertible shares of stock that have been downgraded to a lower stock class. It’s possible to claim losses using these facts, and you’ll need a copy of the company’s form 10-Q or an “8-K” report to support this.

Your stocks, however, cannot be worth less than zero for you to claim a loss.

You also cannot claim a stock loss if any of the following are true:

Your stocks were transferred to a corporation using a Section 351 exchange.

Your stocks were given as a gift.

How to File a Stock Loss on Your Taxes

If you have nothing to do with the stock market, you are probably not familiar with tax rules as they apply to stock trading.

Most people either win or lose when trading stocks. If you lose, though, you may be able to deduct your losses on your taxes as a loss, which can increase how much money you can keep in a given year.

You may want to consult with a tax professional before taking this course of action, especially if you are in your first few years or when you start to take losses and income seriously.

Here are some tips to keep in mind when it comes time to file your taxes.

How a Stock Loss Lowers Your Tax Bill

If you’re a normal investor, then you are probably concerned about the overall market direction. Being an investor in an investment firm, you are more likely to think about the market than the average Joe. Also, you probably talk about stocks with others on a regular basis. However, talking to them about your recent gain or loss is something that you are less likely to do.

Talking to Others about Your Losses

Talking about your loss with others is something that you may feel uncomfortable doing. This is because it places you in a sub-category of investors. You are no longer a normal shareholder. You’re now an investor whose purpose seems to be to lose money.

Talking about your losses is something that you may feel uneasy about, especially if you are in the upper tax brackets. The reason for this is that by bragging about a loss, you would be saying to others that this is what you want to do with your money. It may be a brilliant way of reducing your taxes, but it may also be seen as a Statement that can have an adverse market impact.

Carry Forward Your Capital Losses

Whether it’s as a result of unlucky investments or a complete market disaster, investing is not always profitable. In fact, there is a huge risk that your entire capital is lost if you don’t have money management skills or luck on your side.

However, there are ways to minimize the losses in case of a stock market crash. While you can’t avoid the losses on the stock market completely, you can retain some of the capital by eliminating the tax liability as well.

What is the Loss Trading Deduction?

The loss trading deduction can help you cut your tax liability if you’re lucky enough to have invested in securities and had the opportunity to carry forward capital losses to offset capital gains on your stocks.

The carry forwards can be used in your taxable income to lower your capital gains or to reduce a capital loss. The long-term capital loss carry forwards can be used for capital loss after a stock market crash as well.

Never Let a Stock Loss Go to Waste

If you have ever experienced the agony of watching your investment plummet, you know how devastating a stock loss can be. The shock you feel as you see your portfolio going in the gutter is a lot like a bad car accident. Things move in slow motion and then something snaps to make you realize the stock market just ate your lunch.

The good news is there are ways to lessen the blow of a stock loss. A big part of the pain is knowing that the money is gone for good. But if that was the case, you would never hear the words “buy low, sell high.”

A stock loss distresses you because beyond the emotional connection you’ve developed with your shares, they represent an outcome that’s not yet determined. You are not in a winner or loser position. You are straddling the fence.

If you look at it that way, then it’s a lot easier to accept a stock loss. So keep reading if you want to know how to claim a stock loss on taxes.