Understanding Stock Losses
Stock losses, while never desirable, can serve a valuable tax purpose. In the US, capital losses can offset capital gains dollar for dollar, and up to $3,000 in net capital losses can be deducted against ordinary income each year. Any remaining losses carry forward indefinitely to future tax years.
Tax-loss harvesting, the strategy of intentionally realizing losses to offset gains, is a powerful tax planning tool. This calculator helps you quantify your losses and understand their tax impact.
- 1Total Loss = ($85 - $52) × 100 = $3,300
- 2Percentage Loss = $3,300 / $8,500 = 38.8%
- 3Gains Offset = min($3,300, $5,000) = $3,300
- 4Remaining gains = $5,000 - $3,300 = $1,700 (still taxable)
- 5No excess loss for ordinary income deduction
- 6Tax Savings = $3,300 × 24% = $792
Tax-Loss Harvesting Rules
| Rule | Detail | Limit | Carryforward |
|---|---|---|---|
| Offset capital gains | Losses offset gains dollar for dollar | Unlimited | N/A |
| Offset ordinary income | Net losses deduct from ordinary income | $3,000/year ($1,500 married filing separately) | Indefinite |
| Wash sale rule | Cannot rebuy same security within 30 days | N/A | Loss is disallowed, added to new cost basis |
| Long vs. short matching | Short losses offset short gains first, then long | N/A | Unused losses carry character |
Tax-Loss Harvesting Strategy
If you sell a stock at a loss and buy the same or substantially identical security within 30 days before or after the sale, the loss is disallowed. The disallowed loss is added to the cost basis of the new shares. This applies across all your accounts, including IRAs.
- Capital losses have no expiration date; unused losses carry forward indefinitely
- Married couples filing jointly share the $3,000 ordinary income deduction limit
- Short-term losses are more valuable tax-wise because they offset short-term gains taxed at higher rates
- Consider tax-loss harvesting in December to offset current-year gains
- Unrealized losses are not deductible; you must sell to realize the loss for tax purposes