Capital Pains: Rules for Capital Losses
by Julian Block
When securities markets swoon and apprehensive investors bail out of their holdings, they console themselves with deductions for capital losses when it comes time to file taxes.
But long-standing rules limit deductions for losses on sales or redemptions of shares of individual stocks, bonds, mutual fund shares and exchange-traded funds (ETFs).
In this article
- Prohibited Offsets
- How Much Can Be Deducted?
- Worthless Stocks
- Wash Sales
- Year-End Transactions
- State Income Taxes
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The big hurdle is Internal Revenue Code Section 1211, which caps the deduction at $3,000 for both married couples and single filers. (Married couples who file separate returns are limited to a maximum deduction of $1,500 per person.) These dollar limits haven’t been revised upward since they went on the books in 1978, when Jimmy Carter was in the White House.
In my experience, many individuals focus just on the $3,000 ceiling and forget that the tax code authorizes them to be resourceful when they incur capital losses. Section 1211 allows capital gains on investments to be fully offset by capital losses on other investments. There is also another significant break that investors fail to take advantage of: Losses on sales or redemptions of stocks, bonds, mutual funds or ETFs held in taxable accounts can be used to offset gains on sales of capital assets other than stocks, bonds, etc. This opens up many possibilities—for instance, profits on sales of collectibles, vacation homes, undeveloped land, active farms, commercial property of all kinds, and rental property.
Take, for example, the case of Marilyn Paul. Marilyn plans to sell her personal residence and anticipates a capital gain greater than the exclusion amount of up to $500,000 for married couples filing jointly or $250,000 for singles and married couples filing separate returns. Marilyn should consider realizing losses on, say, shares of stock or mutual funds to offset the taxable part of her gain.
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Discussion
One implication to be drawn from this very valuable article is that the couple should not let their $90,000 in losses be carried forward for 30 years, writing off $3,000 against income each year. That loss should be considered an asset and not allowed to just sit there. They need to get back on that horse after being tossed. Capital gains now have a no-tax advantage for them over other forms of investment. Just like municipal bonds are often compared to other investments on an after-tax basis, they can do the same with capital gain investments. The mistake would be to exclusively hide in CDs and dividends.
posted over 2 years ago by Lee Wenzel from Minnesota
How would you use it as an asset when the loss can only offset gains incurred in the same year as the loss or the $3k/yr against income?
posted over 2 years ago by Marc from Florida
It is my understanding that the unused prior years losses can offset future capital gains, without be subject to the $3000 per year exclusion. It is also my understanding, but I need to verify this, that the Capital Loss Carryforward (those unused losses) can be used on any capital gain, ST and LT, irrespective of what they were in the original loss.
So what Lee, above, was saying ... instead of waiting 10 years at $3K per year to run this 'asset' off, ... feel free to sell out of an appreciated asset that you no longer wish to be invested in, offsetting its gains against this unused Loss Carryforward. Otherwise you might be inclined to hold it perhaps longer than you preferred to avoid paying the taxes on its gains.
posted over 2 years ago by Oreon from Massachusetts
We have used TaxCut to fulfill the compelled drudgery. When a capital loss is computed it completes a "worksheet from the instructions" to "adjust", i.e. minimize, the loss carry forward. This entirely contradicts the assertion that the entire amount of loss exceeding $3000 can be applied in subsequent years. We would love to know that the computer program is incorrect but would be grateful for knowing authoritatively which is right.
posted over 2 years ago by Blake from North Carolina
Why do I need to SIGN IN every time I log in to read the articles on the internet if I am a MEMBER?????????????
marthakritt@verizon.ne
posted about 1 year ago by Martha from California
In most case one would want to minimize the loss carried forward since this minimizes your taxes in that year. You do NOT have a choice to use $3000 of the loss against "ordinary income" each year (even if you have no income $3000 of the loss is used each year [IRS Pub 17 pg 114 tax year 2010].
posted about 1 year ago by Thomas from Virginia
Next spring my wife intends to sell our home at an estimated loss of at least $500,000. We file jointly and have two 1032 property investments for 6 years at a cost of $230,000, if we were to sell them, could we use the loss against the profit? Which other gains may be used?
posted about 1 year ago by Eric from New Jersey
The wash sale loss disallowed in the
current year is not gone forever.
The loss is used to adjust the basis
of your new shares and can be realized
when they are sold as an adjustment in
basis.
posted 3 months ago by Timothy Bruce from Virginia
(1). Can capital gain distributions from a mutal fund company be offset by losses of the sale of stock in a different company?
(2). Can capital gain distribtions from a mutal fund company be offset by selling shares at a loss from the same company?
posted 2 months ago by Henry Will from Florida
