Using Stock Market Losses for Tax Benefits
During the recent economic recession many investors watched as the stock markets crashed, wiping out many of their gains and erasing profits from the stock and mutual fund portfolios. But there is a silver lining to the cloud, because those who have lost money on stocks can often offset those losses somewhat by using them to reduce the amount of taxes they have to pay to the IRS.
Although the rules and regulations are somewhat complex and are often changed through new legislation, tax guidelines generally allow you to deduct losses incurred in the stock market. If you bought some shares of a stock at $100 a share, for example, and held them for a year only to discover that the share price dropped to only $10 a share, you have a loss of $90 – not counting stock broker fees. In most cases you can deduct that $90 loss from your annual gross income. By doing so you reduce the amount of income you have to pay taxes on, and that can translate into a significant savings.
Another way to approach tax time in relation to stock investments is to pair whatever losses you have experienced with gains. That way the amount of taxes you are required to pay on your capital gains can be lessened due to the losses. Let’s say that you made a profit of $500 on one smart investment. You’ll be expected to pay taxes on that profit. But if within the same tax filing year you also sell some other stocks for a $500 loss, the two calculations will essentially cancel each other out and you’ll have to pay no taxes on those stock transactions.
In order to qualify for tax losses you have to sell before the end of the tax year, and there are other details and guidelines that apply – depending upon your particular situation. So, as with any tax matter, it is a good idea to consult a qualified tax specialist or financial planner before making assumptions about savings or taking steps to sell assets like stocks. But most tax professionals can help you leverage those terrible stock market losses into savings at tax time. Especially if you plan ahead and sell strategically while keeping track of gains and losses by holding on to important stock transaction documents, stock market disappointments can often be transformed into tax time benefits.
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