Taxpayers hate to lose money on their investments. But when you sell those loser investments, you’ll usually receive a tax benefit for capital losses.
As taxpayers begin to collect information about the gains and losses from 2014 stock transactions, they should be mindful of some fundamental reporting rules. Sales of stock are reported on Form 8984, Sales and Other Dispositions of Capital Assets. Form 8984 totals are then entered on Schedule D of Form 1040.
Capital losses are netted against capital gains in simple order. First, short term losses are offset against short tern gains. If the result produces a short term gain, the value is entered on Form 1040 and is taxed with other income.
If the amount of the taxpayers net long term gain exceeds the net long term loss, the resulting long-term gain is reported. However, special worksheets are used to compute the tax so that capital gains can be applied.
If capital losses exceed capital gains, then the excess capital losses can be carried forward and used in future years. There is no limit on this carry forward. Secondly, $3,000 of a capital loss can be used to offset ordinary income.
Example: If you have a $15000 capital loss and no gains, you can use $3,000 of the capital loss to deduct against ordinary income. If your ordinary income is $60,000, you will get to deduct the $3,000 of capital loss and so you will only pay tax on $57,000 of ordinary income.