Monday, August 24, 2015

Why Can't I Deduct Those Losses: The Double or Quadruple Whammy of Your Losses in the Stock Market

Another Black Monday.  What do you need to know about stock market losses related to your taxes.

Limited Reduction of Income on Your Tax Return for This Year

The smoke is rising from his ears and he wants to know why he can't use his stock market losses to offset his income on his income tax return.  Yeah, it is a bad deal.  To add to salt to a festering wound you are limited to taking capital losses, like losses on your stock trades, up to a net of $3,000.  So net means you can use actual losses to offset any actual gains you had on trades this year plus up to $3,000 of losses.  When you have lost over $3,000 of value that is not enough.  

What about the rest of those actual losses?  You can carry those forward and use them in future years.  But remember those are only the actual losses.  

Actual Losses Only

Actual losses are losses from positions you have closed out of.  In other words losses from stock that you have sold.  If you still hold the stock, now a loss position but an active position, those are not yet actual losses you can report on your tax return.  It is only the losses from stock you have sold.

Wash Sale Limitations

Before you think about it, no you cannot sell a position and reenter it within 30 days.  If you do it is a wash sale and not typically deductible on your tax return.  So even if you want to stay in a position for some reason you can't sell to take the loss and then get right back in.  You will loose the loss.

No Losses From Retirement Accounts

And no you cannot deduct losses from your retirement accounts on your tax return.  You see those funds were never taxed and you do not get to deduct losses just as you don't pay taxes on gains until you take the money out and then they are taxed at ordinary income tax rates rather than the favorable capital gains tax rates.

So that is actually four whammies or a quadruple whammy from your losses in the stock market.  No one likes losses and especially when they are compounded by the tax laws but you need to know how those losses will be treated from a tax standpoint.  It is better to know what to expect now so you can make informed decisions rather than be surprised later.

Of course, if you are classified as Qualified Trader then there are a different set of rules for you and your trading activity.

I would like to help you succeed with your financial plans and with your businesses.  Feel free to use my contact information below to contact me to discuss what I can do for you.  Yes, we can discuss strategy to deal with those stock market losses.

Jeff Haywood, CPA

The CPA Superhero

Follow the CPA Superhero on Twitter:

My posts contain general information that does not fit every situation, they are not all inclusive, and as always for your tax situation everything "depends on facts and circumstances."  In addition, the information/IRS requirements are always subject to change.  So call me to talk about your specific facts and circumstances and what you want to accomplish.