Tax Breaks Ease the Pain Of Investment Losses
And capital-gains rates on winners are as low as 0% for some.
No one likes losing money on an investment, but tax laws offer some relief. Taxpayers who realized investment losses during 2009 can use them to offset capital gains, reducing their tax bill. Plus, they can use losses that exceed capital gains to wipe out up to $3,000 of ordinary income, such as wages. And if they have any remaining losses, they can carry them forward to use in future years.
You must actually sell an investment to realize the loss; paper losses don’t count. And the investments must be held in a taxable account, not a retirement account such as an IRA or a 401(k).
Timing matters
Capital gains and losses are classified as short-term or long-term, depending on how long you hold an investment before you sell it. If you hold it for one year or less, your capital gain or loss is short-term. If you hold it for more than a year, your capital gain or loss is long-term.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
You match up your short-term losses against your short-term gains and your long-term losses against your long-term gains. Net short-term gains are taxed at your ordinary income-tax rate, which can be as high as 35%. Net long-term gains are taxed at lower capital-gains rates.
For 2009, the maximum capital-gains rate for most people is 15%. Taxpayers in the two lowest income-tax brackets -- 10% and 15% -- pay 0% on their investment gains and qualified dividends. (Collectibles, such antiques, gems and precious metals, plus stamp and coin collections, are taxed at a special 28% capital-gains rate.) Capital gains and losses are reported on Schedule D.
Worthless stock
In some cases, it’s impossible to sell securities to claim a loss because the securities have become worthless. Taxpayers can claim the loss as having occurred on the last day of the year in which the securities lost all value. The key is that the security must truly have no value. The worthlessness has to be established by some identifiable event, such as a bankruptcy that totally wipes out shareholders’ value or by a company actually going out of business.
Sometimes, a company’s stock will still trade -- perhaps for pennies a share -- even following a bankruptcy, so it still has some value. In that case, your broker may help take the shares off your hands so you can write off the loss. Many brokers have special rules for buying nearly worthless stock from customers, charging a few dollars to buy the shares and giving you the necessary documentation you need to declare a loss.
Help for Ponzi scheme victims
Some investors are left high and dry because their “investments” were never invested in the first place. The most notorious recent Ponzi scheme was run by Bernie Madoff, who was sentenced to prison in 2009 for running a wealth-management business that defrauded thousands of investors of billions of dollars. (In a classic Ponzi scheme, named after a man who perpetrated a gigantic fraud in the 1920s, investors are paid “earnings” out of the money that they, or new investors, have contributed, without any real profits having been realized.) More than 150 Ponzi schemes came to light in 2009.
Losses in fraudulent investment schemes receive special treatment under the tax laws. They are treated as theft losses, rather than ordinary investment losses, so they are not limited to offsetting only $3,000 of ordinary income. And they are not subject to the ordinary limitations on casualty and theft losses, which have a $500 floor in 2009 and are deductible only to the extent that they exceed 10% of adjusted gross income.The amount of the loss equals the amount invested less any “profits” or “earnings” received and any recovery victims have made or are likely to make. The loss can also include any income taxes previously paid on “earnings.” Victims are allowed to claim the loss in the year in which they discover the fraud.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Stock Market Today: Dow Adds 654 Points as 3M Stock Explodes Higher
It was a risk-on day for stocks thanks to an upbeat inflation reading and impressive earnings from 3M and Deckers.
By Karee Venema Published
-
3M Leads Dow Stocks After Massive Earnings Beat
3M stock is headed toward its best day ever after the industrial conglomerate's impressive earnings report. Here's what you need to know.
By Joey Solitro Published
-
IRS Ends Inherited IRA Confusion: Annual RMDs Required for Many
IRAs The agency has resolved a major point of uncertainty for inherited IRA beneficiaries.
By Kelley R. Taylor Last updated
-
$145 Million in ‘Senior Freeze’ Checks Mailed
Property Tax What you need to know about New Jersey's property tax relief program for older adults.
By Kate Schubel Published
-
TaxAct Class Action Settlement: Details to Know
Tax Filing A multimillion-dollar settlement over alleged data privacy violations affects some TaxAct users.
By Kelley R. Taylor Last updated
-
An IRA Contribution Option You Might Not Know
IRAs Retirement savings might not have to take a back seat just because your partner doesn't earn income.
By Kelley R. Taylor Last updated
-
Project 2025 Tax Overhaul Blueprint: What You Need to Know
Tax Proposals Some people wonder what Project 2025 is and what it suggests for taxes.
By Kelley R. Taylor Last updated
-
The Taxes That Come out of Your Paycheck
Payroll Tax Your take-home pay is often less than expected due to several payroll tax withholdings you need to know.
By Kelley R. Taylor Last updated
-
Seven States Where Gas Tax Increased July 1
Gas Taxes Since July has arrived, drivers in several states are facing a gas tax hike.
By Kelley R. Taylor Last updated
-
401(k) Withdrawal Penalty Rule Changes for 2024
Tax Rules More people are taking early emergency withdrawals from retirement savings accounts. New rules might offer some relief.
By Kelley R. Taylor Last updated