Your goal in buying stocks is to make money. But there may come a point when you need to sell a stock at a price that's lower than what you paid for it.
Maybe you bought shares of a company promising an innovative way to diagnose medical conditions, only its technology failed a year or so after you bought those shares. That sort of news is enough to make a company's share price plummet and fail to stage a recovery.
As a general rule, you don't want to sell stocks whose share price is down as part of a broad market tumble. If the stock market undergoes a correction (a period where stock values broadly fall 10% or more), it means there's general turbulence -- not that there's something wrong with the specific investments you own.
But when you own stocks in your brokerage account that keep underperforming, and are unlikely to recover, then it's often best to dump them and take a loss rather than have them take up real estate in your portfolio. You might, for example, dump a stock whose share price started out at $50 but has continuously dropped to the point where it's now only worth $10, and you don't see that stock ever climbing again.
The good news, though, is that you can use this type of loss to your financial advantage. Here's how.
You can offset capital gains
Capital gains taxes apply when you sell assets at a price that's higher than what you paid for them. If you buy shares of a given company for $100 apiece and sell them for $250 apiece, you're looking at a $150 gain per share.
If you sell stocks at a loss in your portfolio, you can use your losses to offset capital gains. That way, you might wipe out your tax liability associated with those profits.
You can offset a limited amount of ordinary income
Let's say you're forced to sell a stock at a loss but you don't have any gains in your portfolio to offset. In that case, you can use your loss to offset up to $3,000 of ordinary income per year.
So, let's say you take a $5,000 loss on a given company and have $2,000 in capital gains that same year. In that case, you'd first wipe out those gains and then use the rest of your loss to offset your $3,000 of earnings. But in that situation, if there are no gains to offset, you'd simply offset $3,000 of income and call it a day.
Now you may be wondering what happens to that extra $2,000 loss. The answer is, it doesn't go away. Rather, you can carry it forward to future tax years and offset gains or income at that point.
A silver lining
The whole point of investing money is to grow more wealth, and selling stocks at a loss achieves the opposite goal. But sometimes, it becomes necessary to sell a stock for a price that's less than what you paid for it. And in those situations, you can at least take comfort in the fact that your loss can be used to lower your tax liability in one way or another.
FAQs
Investors and traders use tax-loss harvesting to minimize tax liability by selling losing positions to offset capital gains or reduce ordinary income. This cuts down on the amount of taxes you owe.
What happens if I sell my stock at a loss? ›
“If a good part of your portfolio is up in value, while a smaller part is down,” Curtin says, “selling some of those 'down' investments at a loss — known as tax-loss harvesting — could help offset the tax you owe from the gains earned on your sale of better-performing stocks.” What's more, if your capital losses are ...
Do I get a tax break if I sell stock at a loss? ›
The IRS allows you to deduct from your taxable income a capital loss, for example, from a stock or other investment that has lost money. Here are the ground rules: An investment loss has to be realized. In other words, you need to have sold your stock to claim a deduction.
How soon can I buy a stock back after selling at a loss? ›
More specifically, the wash-sale rule states that the tax loss will be disallowed if you buy the same security, a contract or option to buy the security, or a "substantially identical" security, within 30 days before or after the date you sold the loss-generating investment.
How does selling for a loss work? ›
Tax-loss harvesting involves selling an investment at a loss in order to offset the taxes resulting from a capital gain. Typically, the asset sold at a loss is replaced with a similar investment after a certain timeframe.
Do I have to pay tax if I sell shares at a loss? ›
If you made the loss carrying on a business of share trading, it is a revenue loss. On your tax return, you treat it the same way as any other losses from business. You can generally offset the loss against income from other sources.
Can you write off 100% of stock losses? ›
You can deduct stock losses from other reported taxable income up to the maximum amount allowed by the IRS—$3,000 a year—if you have no capital gains to offset your capital losses or if the total net figure between your short- and long-term capital gains and losses is a negative number, representing an overall capital ...
Is it smart to sell stock at a loss and rebuy? ›
However, the wash sale rule prevents investors from “manufacturing” tax losses by selling stock or other securities at a loss and then quickly repurchasing them (e.g., to end up with the same investments as before the sale). If the rule is broken, you can't use the loss to reduce taxable income.
What is the last day you can sell stocks for a loss? ›
It's a common question. This year, the last day in 2024 for tax-loss selling is December 27, 2024. If you sell at a loss on or before that date (for example a stock listed on the Toronto Stock Exchange) you are able to deduct your loss against your 2024 capital gains.
What is the penalty for a wash sale in stocks? ›
Wash sales are not illegal but have negative tax implications: losses from such sales cannot be used to offset gains in the same tax year. However, these losses can be added to the cost basis of the newly purchased security, affecting future gains.
Selling a stock for profit locks in "realized gains," which will be taxed. However, you won't be taxed anything if you sell stock at a loss. In fact, it may even help your tax situation — this is a strategy known as tax-loss harvesting.
Is it illegal to sell at a loss? ›
It is unlawful for any person engaged in business within this State to sell or use any article or product as a "loss leader" as defined in Section 17030 of this chapter. Amended by Stats.
What is the loss rule for selling stocks? ›
The main limitation from a tax-laws standpoint individuals need to be aware of with tax-loss selling is what's termed “superficial loss.” These rules look at the period of 30 days before and after the sale date, and will deny an individual's ability to claim a loss if they sell at a loss and then they or an affiliated ...
Do you owe money if a stock goes negative? ›
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
Can you sell shares at a loss? ›
When shares are sold for less than the amount originally paid for them, a capital loss arises. Unfortunately, capital losses arising on the sale of listed shares cannot be offset against income tax liabilities. Instead, they are offset against capital gains arising either in the same tax year, or in future years.
Who gets the money when you lose on a stock? ›
“In other words, the money did not exist or disappear for long-term investors if you did not make any transactions. However, for short-term investors, when stock prices go up or down, the money would be transferred among them as a zero-sum game, i.e. your losses would be others' gains, and vice versa.”
