Tax Deductions for Capital Losses: How This Deduction Works

If you’ve incurred a significant loss from the sale of assets you owned or used for investment or personal purposes, you can claim those losses on your 1040 form as capital loss deductions. Capital loss deductions can reduce your taxable income, meaning a smaller tax bill (with limitations on deduction amount)–or a larger refund depending on your situation.

Definition of Capital Loss

A capital loss is the difference between the cost, or basis, of an asset and the amount for which the asset was sold. If the asset sells for more than its basis, you incur a capital gain. If the asset sells for less than its basis, you incur a capital loss. Certain capital losses are not deductible, such as losses incurred from the sale of your personal vehicle or home.

Examples of Capital Loss

Anything you own or use is considered a capital asset. Examples include household furnishings, jewelry or precious metals (gold and silver), bonds, stocks, securities and coin and stamp collections. Property you own is also a capital asset, with the following exceptions:

• Property you acquired as a gift
• Property intended for sale to customers
• Property used in your business or trade
• Copyrighted literary, artistic or musical works you created or were produced or prepared for you

How it Works

Capital gains or losses on assets held longer than a year, beginning from the day after the date of their acquisition to the day the assets were sold, are long-term gains or losses. Capital gains or losses incurred on the sale of assets held less than a year before they were sold are short-term gains or losses. You will need to complete a Form 8949 to figure out your short-term and long-term capital gains and losses, then report them on Schedule D of your 1040 form.

You can claim up to $3,000 of the capital losses that exceed your capital gains (married filers filing separately can claim up to $1,500). Capital losses in excess of $3,000 can be applied to subsequent tax returns. If those losses are substantial, you could claim a deduction for several years. You can figure out the amount to carry forward on the Capital Loss Carryover Worksheet (Publication 550).

Capital Loss Deductions on Wash Sales

Losses from wash sales cannot be claimed as a capital loss deduction unless they occurred in the normal course of your business as a securities or stock dealer. A wash sale is the phrase used to describe selling or trading securities or stock at a loss and then buying or acquiring shares of the same securities or stock within 30 days before or after the sale or trade. Wash sales are reported on Form 8949 and Schedule D. It’s best to avoid wash sales if you want the tax benefit of a capital loss. You can also wait until the 61-day wash sale period expires before making another purchase of similar securities or stocks.