Many of you out there have suffered some pretty substantial losses in your portfolios. In an attempt at damage control, many are attempting to harvest those losses, and receive some tax relief.
Let’s go over some of the basics. If you sell stock and lose money, it’s what’s referred to as a capital loss. A capital loss is claimed on your tax return as a reduction to ordinary income. You can only claim up to $3,000 in any given tax year ($1,500 if Married Filing Separately), unless you have gains to offset it.
For example, let’s say that you lost$112,000 on a series of trades earlier in 2009, and then had a $100,000 profit later in the year. You would offset the $100,000 capital gain with your $112,000 capital loss, leaving you with a capital loss of $12,000.
You could then deduct $3,000 from your ordinary income, and carry the remaining $9,000 loss over to the following year (2010). Again, if you didn’t have any gains to offset your loss, it would be depleted in 3 years.
For the most part, capital losses can be claimed until they are depleted. The only real exception is in the event of the taxpayers death. When someone dies, their capital loss dies with them. This is especially important to be aware of if the spouse with the loss predeceases the one without a loss.
Excess capital losses are forfeited, and cannot be carried over to the surviving spouses 1040. If the property was owned jointly by a decedent and a surviving spouse in a community property state, logic would dictate that the survivor would be entitled to half of the loss.
