Ask a Fool: Can I Use Stock Market Losses to Lower My Taxes?

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Q: I bought a stock three years ago and my investment is down about $1,000. If I sell it now, can I write off the loss?

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The short answer to your question is yes. In fact, many people sell losing stock investments with that specific goal in mind, especially around the end of the year, a concept known as tax-loss selling.

As far as a write-off is concerned, it depends how long you've owned the stock and if you have capital gains from other investments.

If you've owned the stock for more than a year, the loss will be considered a long-term capital loss. If you've owned it for a year or less, it will be considered a short-term capital loss.

If you have any capital gains from the sale of stock or other investments, your loss will be used to offset this income first. Long-term losses will first be used to offset long-term gains, and short-term losses will first be used to offset short-term gains. After that's done, it can be used to offset any remaining capital gains.

If your losses exceed your capital gains, you can use up to $3,000 in net capital losses to offset your other taxable income sources like your salary. Any excess can be carried over to the next tax year.

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In this specific case, your $1,000 loss would be classified as a long-term capital loss. It would first be used to offset any long-term capital gains, if you have any. If not, it would then be applied to short-term capital gains, and any excess could then be used to reduce your other taxable income.

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