It’s almost the end of the year and if you’re like every other investor out there, your stocks have lost a lot of value. It’s good to know the tax implications of your losses, so you can at least gain something. When you sell stocks for a profit, you normally have to pay capital gains taxes on it. If you’ve held the stock for less than a year then it counts are regular income, but if you have held it longer than a year, then it counts are long term capital gains and you are taxed at 15% of your gains (or 5% if your normal tax bracket is 15%).
If you sell stocks for a lost, they are first used to offset any gains and then they can be used to reduce your taxable income up to $3,000. Any leftover can be carried on to the next year.
For example if you have $4,000 in capital gains and $10,000 in capital losses, then $4,000 is counted against your gains and you can count $3,000 toward reducing this year’s income tax and the remaining $3,000 can be used for next year’s taxes. Ideally if you want to take losses, they are most effective if you are in a high tax bracket since your reduction in taxes will be larger.
Wash Sale Rule
Stocks don’t count for losses if you sell them and buy it back in 30 days or less. You need to wait more than 30 days before buying back the same stock.
For more information refer to IRS Topic 409 Capital Gains and Losses.