Making the most of investment losses, part 1: deduction limits

In tax planning as in life, success isn’t always about big victories. In many cases, it involves making the most of your losses.

This can occur, for example, in the context of making proper use of tax deductions for casualty losses. We discussed that issue in our June 26 post.

In this two-part post, we will discuss deductions for investment losses. There have been plenty of losses of this type in the volatile stock market this week.

As an investor, you are probably quite familiar with encountering both gains and losses. It’s important to realize, however, that you may be able to take certain deductions on your federal taxes when you encounter capital losses.

If your capital losses exceed your capital gains, the difference between the two figures is deductible on your federal return up to a certain limit. This limit is generally $3,000 per year. For a married person who is filing separately, however, the deduction limit is only $1,500.

The deduction can be taken against your ordinary income, such as income from wages. It is even possible to carry over losses that you weren’t able to deduct because you had reached the limit in a given year.

The applicable form to be filed with your federal tax return is Form 8949. You will also need to complete Schedule D, Capital Gains and Losses.

Keep in mind, however, that there are also sophisticated tax strategies involving investment losses that you may want to consider. One such strategy is called “tax-loss harvesting.” We will discuss this strategy in detail in part two of this post.