Investments can provide an additional income stream, both while you are working or during your retirement. But there are also the potential risks that come with an investment that does not perform as you expect. A capital loss occurs when you sell off an investment at less than the purchase price or adjusted basis. Any expenses resulting from the sale are deducted from the proceeds and can be added to the overall loss. It must be noted here that you do not incur the loss until you actually sell the stock. Underperforming stock in your portfolio does not give you the same tax benefits, as a stock sold at a loss. To understand your potential tax benefits from the loss of an underperforming stock, consult with a tax professional or accountant, such as EB TAX CONSULTANTS in BROOKLYN, NY.
How Capital Losses Work
While it is a nice tax break to be able to claim the losses from your stock sales, this does not necessarily translate into an easy process. Therefore, you will want to work closely with your tax professional to make sure that your forms are completed correctly to get the maximum tax benefit.
Here what needs to happen:
Short term losses counterbalance those of expensive short term gains. So as you complete Form 8949, you will end up with your short term net gain or loss. If you have no gains at all, then you will be claiming only a loss.
Long term losses will be applied to long term gains. As with short term losses and gains, you will be completing a portion of Form 8949, which will assist you in calculating whether or not you have a net gain or loss. If you have no gain, then you will only show a loss at the end of the form.
Combine the short and long term results onto your Schedule D. By doing so, you can actually use a long term loss to offset a short term gain and vice versa. After completing this calculation, your tax professional will be able to determine if you have a loss. If so, then you will be able deduct up to $3,000 from your other income to offset the loss.
If your loss was greater than $3,000, then you may be able to carry that loss over to be applied to the next year’s gains and up to $3,000 of earned income. However, a very big loss may be used as a deduction over a longer period of time, so it is important to keep good records to determine how much of a deduction you may qualify for.
Timing is Based on the Sale
Since a loss is not really a loss until you sell the stock, you can use the timing of your sales to put the capital losses in years where you could use the benefit of the loss to offset a gain or ordinary income earned in that year. Therefore, you will want to work with your accountant to determine when it might be beneficial to sell an underperforming stock.
Here are some points to consider:
Capital losses are best taken in a year with short term capital gains or even no gains, because then you can reduce your income and as a result, reduce your tax liability. Therefore, it may be worth looking at your portfolio to purge an underperforming stock during a high income tax year.
Long term capital gains have an attractive tax rate, so keep in mind that the benefits from a long term capital loss might not be as great as a loss from a short term investment.
Know your tax bracket. The reason that this is important is because depending on your tax bracket, you may not have to pay capital gains taxes on assets sold for a profit. This is beneficial for individuals who may have retired or those who have reduced their work schedule as they get closer to retirement. Therefore, they may be able to enjoy the benefit of these gains without selling assets to create a corresponding or offsetting loss.
As you can see, there is more to a capital loss than a simple deduction. It involves calculating your losses and gains throughout the year to determine the size of your loss. However, a capital loss can provide plenty of tax benefits, especially if you have a large loss that can be spread over several years.
Click on the link below to connect with a tax professional at EB TAX CONSULTANTS in BROOKLYN, NY, who can assist you in determining if you had a capital loss and how much is available as a potential tax deduction.
ERNIE BUSTAMANTE