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Sharing Your
Stock Market Losses With Uncle Sam
If you've lost money in the stock market, you should be aware of the tax
breaks that capital losses can generate and how to avoid the tricky Wash
Sales trap.
Uncle Sam is always happy to tax you when you make money. But what
happens to your tax situation when you experience losses? Not every
investment will be a winner, so learning how to take advantage of the
tax treatment of capital losses may be as important to you as the recent
run-up in the major stock indexes.
Generally speaking, capital gains and capital losses are reported on
federal Form 1040, Schedule D, for the year in which the actual sale of
capital assets such as stocks, bonds, and mutual funds occurs. A
temporary decrease (or increase) in the value of an asset is not
reported on your tax return; the asset must actually be disposed of. In
the eyes of the federal government, the old Wall Street adage applies:
"You don't make a profit or take a loss until you sell."
Net capital gains and losses are aggregated, and up to $3,000 of a net
capital loss may be deducted against ordinary income items such as
wages, interest, and dividends. Capital losses in excess of $3,000 are
carried forward and deducted in future years, subject to the same
limitation.
Gains and losses from the sale or disposition of capital assets are
classified as long term or short term, depending on how long you held
the asset. For example, a long-term capital asset is currently defined
as an asset you have held for more than one year. Long-term capital
gains generally receive favorable tax treatment. While the top tax
bracket for ordinary income items such as wages is 35%, the maximum tax
rate for long-term capital gains is capped at 15%. Short-term capital
gains are taxed at ordinary income tax rates.
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