Turning Stock Losses Into Tax Breaks

Have you ever invested in a stock, only to watch its value nosedive? With today’s market volatility, you’re not alone. While a sinking stock can be frustrating, there’s a silver lining: you might be able to turn that loss into a tax benefit. Here’s how capital loss deductions work when a stock is sold at a loss—or becomes completely worthless.

Understanding Capital Losses

Stocks are considered capital assets, which means you’ll realize either a capital gain or loss when you sell them. Gains and losses must be calculated and netted out based on how long you held the asset:

• Short-term (held for one year or less)

• Long-term (held for more than one year)

Once your gains and losses are netted, you can deduct up to $3,000 of excess losses against ordinary income (or $1,500 if married filing separately). If your losses exceed this limit, the unused portion carries forward to future years, subject to the same annual limits. If you have both short- and long-term losses, the short-term losses are applied to ordinary income first.

If you’ve experienced capital gains during the year, consider selling some underperforming investments to offset those gains. This strategy, known as tax-loss harvesting, can help minimize your tax bill—especially if you also generate up to a $3,000 net loss to reduce taxable income.

Watch Out for the Wash Sale Rule

Want to sell a stock to claim a tax loss but plan to buy it back soon? Be cautious — the wash sale rule might apply. This rule disallows the deduction if you purchase substantially identical stock within 30 days before or after the sale that triggered the loss.

To preserve your deduction, wait at least 31 days before repurchasing the same or a similar investment.

When a Stock Becomes Worthless

In some cases, a stock might become completely worthless. If it has no liquidation value and no reasonable chance of recovery, you can still deduct your cost basis — usually what you paid for the shares. The IRS treats worthless stock as if you sold it on the last day of the tax year, which determines whether it’s a short- or long-term loss.

Note, a company doesn’t need to declare bankruptcy for the stock to be worthless. On the flip side, if the business continues operating (even after bankruptcy), the shares may still hold some value.

If you discover the worthlessness of a stock after you’ve filed your tax return, you can amend your return to claim the loss. You generally have seven years from the due date of the original return (or two years from when you paid the tax, whichever is later) to do this.

Make the Most of Your Losses

Claiming losses for depreciated or worthless stocks can be a valuable way to reduce your tax bill — but the rules can be tricky. Detailed records and careful timing are key.

If you're unsure how to proceed, we’re here to help you navigate the rules and maximize your tax savings.