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Are Portfolio Losses Tax Deductible?


IRS has a heart. You can take an immediate deduction AND carry over short-term losses and long-term losses.

 

When you sell stocks, bonds or mutual fund shares held in a taxable account, it is a taxable event. You must compare the sale proceeds with the cost basis (what you paid). The difference will be a taxable gain or a tax-deductible loss.

The law allows you to use capital losses to offset capital gains dollar for dollar – first subtracting short-term losses from short-term gains (investments held one year or less), and then subtracting long-term losses from long-term gains (held longer than one year). You can then use any remaining losses to offset remaining gains in the other category.

If you still have more losses than gains, you could also deduct up to $3,000 in losses against other kinds of income, such as your salary. Any losses beyond that are carried over to future years, where you can first use them to offset capital gains, and then, if you still have more losses left over, you can deduct up to $3,000 of any remaining losses from your income. You can continue this process every year until you’ve finally deducted all of your losses.

But under the “wash sale” rule, you can’t deduct the loss if you buy the same investment within 30 days before or after you sell it.

To net your gains and losses, first put your long-term gains and long-term losses in one basket. This gives you either a net long-term gain or a net long-term loss. Next, put your short-term gains and short-term losses in another basket. This results in either a net short-term gain or a net short-term loss. Finally, combine the net long-term gain or loss with the net short-term gain or loss to arrive at an overall net capital gain or loss.

 

For more information contact me at jamess@baron-financial.com

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