do you pay taxes on stocks that lost money? A practical guide

Do you pay taxes on stocks that lost money?

Investors often ask: do you pay taxes on stocks that lost money? This guide answers that question clearly and step‑by‑step. You’ll learn the difference between realized and unrealized losses, how the U.S. federal tax system treats capital losses, where to report them, key rules like the wash‑sale rule, practical tax‑loss harvesting strategies, special cases (IRAs, gifts, inheritance), state and international notes, numeric examples, and what records to keep. Bitget users and cryptocurrency traders will also find notes on handling similar rules for crypto and using Bitget Wallet for recordkeeping.

As of January 2025, according to MarketWatch, policy discussions about retirement account access and 401(k) withdrawal rules were underway — a reminder that retirement and taxable brokerage accounts follow different tax treatments and that rule changes can affect where investors hold assets and how losses are managed.

Summary / Key takeaways

• Short answer to “do you pay taxes on stocks that lost money?”: generally no — losses reduce taxable gains rather than creating a tax bill.
• Realized capital losses (losses on positions you sold) offset realized capital gains first. If losses exceed gains, up to $3,000 ($1,500 if married filing separately) of the net capital loss may reduce ordinary income each year under current U.S. law.
• Any unused net capital loss beyond the $3,000 limit can be carried forward indefinitely to future tax years.
• Unrealized losses (positions you still hold) do not affect current taxes until you sell — mere declines in market value are not deductible.
• Reporting: brokers issue Form 1099‑B; you report details on Form 8949 and Schedule D of Form 1040.
• Watch out for the wash‑sale rule: buying a substantially identical security within 30 days before or after a sale that produced a loss generally disallows that loss (it’s deferred by adjusting basis).
• Special accounts like IRAs and 401(k)s do not allow capital‑loss deductions on your personal tax return.

Definitions

Before we explain tax mechanics, here are concise definitions of key terms used in this guide. Clear terminology helps when deciding whether to sell, hold, or harvest losses.

• Capital loss: The difference between the sale proceeds and your cost basis when the sale price is lower than the cost basis. If you bought a stock for $10,000 and sold it for $7,000, you have a $3,000 capital loss.

• Realized vs. unrealized loss: A realized loss occurs when you sell (or the security is disposed of) at a price below your basis. An unrealized loss is a paper loss — the position’s market price is below your cost basis but you have not sold.

  • Why this distinction matters: only realized losses are recognized for tax purposes. Unrealized losses do not change your tax bill until you finalize the sale.

• Cost basis: The original price you paid for the shares plus commissions and adjustments. Cost basis can be adjusted for stock splits, dividends that are return of capital, or other corporate actions.

• Adjusted basis: Your cost basis after permitted adjustments (e.g., reinvested dividends, wash‑sale adjustments). Adjusted basis is the figure used to calculate gain or loss when you sell.

• Holding period: The time between purchase and sale. It determines whether a gain or loss is short‑term or long‑term.

• Short‑term vs. long‑term loss: If you held the security for one year or less at sale, the loss is short‑term. If held more than one year, the loss is long‑term. The tax system treats short‑term and long‑term gains differently, and losses net against gains by type before producing a net capital loss.

How capital losses affect U.S. federal taxes

Answering “do you pay taxes on stocks that lost money?” requires understanding the capital gains and losses netting process and annual limits. Here’s how it works step by step:

1. Categorize gains and losses by holding period.

   • Net short‑term gains and losses first: short‑term gains (taxed at ordinary income rates) are netted against short‑term losses.
   • Net long‑term gains and losses next: long‑term gains (taxed at preferential capital‑gain rates) are netted against long‑term losses.

2. Offset across types if needed.

   • If one side (short or long) is a net gain and the other a net loss, the loss offsets the gain in the other category to produce a single net capital gain or loss for the year.

3. If total net result is a gain, you pay tax on net capital gains according to short‑term or long‑term rates.

4. If total net result is a loss, you do not “pay taxes” on that loss. Instead:

   • You can deduct up to $3,000 ($1,500 if married filing separately) of net capital loss against ordinary income each tax year.
   • Any remaining loss beyond $3,000 is carried forward to the next tax year and treated as if it occurred in that next year — continuing to offset gains and up to $3,000 of ordinary income annually until exhausted.

5. Carryforwards have no expiration for federal tax purposes; they continue indefinitely until used up.

Important notes about rates and ordering:

• Short‑term gains are taxed at ordinary income rates. So offsetting short‑term gains with losses avoids higher ordinary‑rate tax.
• Long‑term gains are taxed at preferential rates (0%, 15%, or 20% depending on taxable income), so the netting order preserves those tax distinctions.
• If you harvest losses to offset gains, be mindful of timing and the character (short vs long) of both gains and losses.

Reporting losses on your tax return

Knowing the netting rules is one thing; properly reporting losses is another. Here is how to report capital losses in the U.S.

• Brokerage reporting: In early year following the tax year, most brokerages issue Form 1099‑B showing proceeds, reportable basis, and whether a gain/loss is short‑ or long‑term. Keep your trade confirmations and year‑end statements to reconcile differences.

• IRS forms involved:

  • Form 8949: Use this to report each transaction that produced a capital gain or loss when the broker’s basis reporting is incomplete or requires an adjustment. Include dates acquired and sold, proceeds, cost basis, adjustments, and resulting gain or loss.
  • Schedule D (Form 1040): Summarizes the totals from Form 8949 and shows the net short‑term and long‑term gains and losses and the final net capital gain or loss to carry to Form 1040.

• Information required per sale: dates of acquisition and sale, proceeds (gross sale amount), cost basis (adjusted if needed), and any adjustments (for wash sales or other items).

Common reporting issues and how to handle them:

• Broker basis mismatches: Sometimes a broker reports an incorrect or missing cost basis on 1099‑B. Don’t simply accept the broker’s numbers. Reconcile with your own records and, if needed, attach Form 8949 with the correct basis and include an explanation.

• Disallowed losses: If a wash sale or another rule disallows a loss for the current year, you must report the disallowed loss as an adjustment and increase the basis of the replacement shares.

• Multiple lots and average cost: For stocks the default method is usually FIFO unless you specifically designate lots (e.g., specific identification). Mutual funds often use average cost rules. Make deliberate lot‑selection decisions where helpful and document them.

The wash‑sale rule and its consequences

One of the most important traps for investors asking “do you pay taxes on stocks that lost money?” is the wash‑sale rule. The wash‑sale rule prevents taxpayers from claiming a loss on a sale if they acquire a substantially identical security within 30 days before or after the sale. Key points:

• Basic rule: If you sell shares at a loss and buy substantially identical shares within the 61‑day window (30 days before sale, day of sale, 30 days after sale), the loss is disallowed for the tax year of the sale.

• Disallowance is temporary, not permanent: Instead of allowing the loss, the IRS requires you to add the disallowed loss to the cost basis of the newly purchased (replacement) shares. This adjustment defers the loss until you sell the replacement shares.

• Scope and examples: The rule applies to purchases in taxable accounts and includes purchases made across accounts you control. That can include purchases in an IRA, a spouse’s account (if filing jointly, careful attention is required), or across multiple brokerages.

• Substantially identical: The IRS doesn’t give a precise bright‑line test. For simple common stocks of the same company, identical is straightforward. For ETFs and index funds, whether two instruments are substantially identical is more nuanced. For example, two ETFs that track the same index but use different methods or issuers might not be substantially identical — but the safe approach is to assume similar instruments can trigger the rule unless clearly different.

• Practical consequence: Attempting to lock in a loss while reinvesting in the same security within 30 days will usually cause a wash sale. The loss is deferred, and you lose the immediate tax benefit.

Practical tips to avoid accidental wash sales:

• Wait 31 days before repurchasing the same security.
• Use non‑identical replacement investments (see tax‑loss harvesting below) such as a different ETF tracking the same asset class or a broad sector fund that is not substantially identical.
• If you use tax‑advantaged accounts, be very cautious: buying the same security in your IRA within the 30‑day window will still trigger wash‑sale rules and permanently disallow deduction for the loss in many cases (you do not get a basis step‑up in IRA accounts).
• Use specific lot identification when selling: specify the tax lots you intend to sell so you can manage the holding period and avoid inadvertent wash sales.

Tax‑loss harvesting strategies

Tax‑loss harvesting is the technique of selling losing positions to realize losses for tax purposes, then reinvesting proceeds in a similar (but not substantially identical) security to maintain market exposure. It’s a common practice among taxable investors. Here’s how to approach it responsibly:

• Goals: Offset realized gains, reduce tax bills in the current year, or create deductible net capital losses that offset ordinary income up to $3,000 annually.

• Basic steps:

  1. Identify positions with unrealized losses that no longer fit your investment thesis or that you are willing to sell.
  2. Sell the position to realize the loss.
  3. Reinvest proceeds in a similar but not substantially identical security to keep market exposure while avoiding the wash‑sale rule.

• Replacement securities: If you sold an S&P 500 ETF, consider buying a different S&P 500 ETF from a different issuer only if not substantially identical — but because the IRS can view two ETFs tracking the same index as substantially identical, a safer choice is a broad large‑cap total‑market ETF or a large‑cap mutual fund that is not described as tracking the same exact index.

• Time‑based alternative: The 31‑day wait. Sell, sit in cash or short‑term Treasury funds for at least 31 days, then repurchase the original security. This guarantees avoiding the wash‑sale rule but introduces market timing and tracking risk.

• Rebalancing and drift: Tax‑loss harvesting can create portfolio drift. After implementing harvesting, review portfolio weights and rebalancing needs. Don’t let tax goals drive you to a portfolio that no longer meets your investment objectives.

• Costs and complexity: Consider transaction costs, bid‑ask spreads, and tax preparation complexity. For small losses (e.g., under a few hundred dollars), the administrative cost may outweigh the tax benefit.

• Automated tools and brokers: Many platforms and tax advisors provide tools to track lots and suggest harvesting opportunities. Bitget users can export trade histories and use Bitget Wallet records to simplify accounting in taxable accounts.

Special cases and exceptions

Several situations change how losses are treated. These deserve careful attention because the default rules may not apply.

• Worthless securities: If a security becomes worthless during the tax year, the IRS generally treats it as if it were sold on the last day of the year for a zero sale price. This can create a capital loss for the year even without formal sale.

• Retirement and tax‑advantaged accounts: Losses inside tax‑deferred or tax‑exempt accounts (IRAs, 401(k)s, Roth IRAs, qualified retirement plans) are generally not deductible on your personal tax return. Selling a losing position inside an IRA won’t produce a deductible loss.

  • Interaction with wash sales: If you sell a security for a loss in a taxable account and buy the same security inside your IRA within the wash‑sale window, the loss may be disallowed and not subject to basis adjustment — effectively you may lose the tax benefit. Exercise care.

• Mutual fund distributions: Even if your fund declines in price, mutual fund capital gain distributions (from the fund selling holdings) can create taxable gains for shareholders. You may realize losses on stock positions while receiving distributed gains from a fund you hold.

• Short sales: Gains and losses on short sales have special timing rules. A short sale closed for a loss produces a realized loss, but the holding period and character can have nuances. Consult guidance for short sale reporting.

• Securities acquired by gift: Cost basis rules vary. If you receive a gifted asset and later sell at a loss, the donor’s basis and date of acquisition affect your gain/loss calculation. Special rules exist when basis exceeds fair market value at the time of gift.

• Inherited securities: Basis is generally stepped up (or down) to the fair market value at the decedent’s date of death (or alternate valuation date). Losses on inherited property are often computed from that stepped‑up basis.

• Options and complex instruments: Options, futures, and other derivatives have special rules (Section 1256 contracts, straddles, etc.). Loss timing and character can be complex.

Interaction with state taxes

Most U.S. states begin with federal taxable income and then apply state rules. Many states follow federal treatment of capital gains and losses, but differences exist.

• Common state variations: Some states don’t tax capital gains at all, while others tax gains as ordinary income. Some states have different carryforward rules or may limit deductions. Always verify how your state treats capital losses.

• Practical step: Keep a state‑specific record of carryforwards because you may need to compute state taxable income differently from federal. Consult a tax professional or your state revenue department for exact rules.

International and non‑U.S. considerations

If you live outside the U.S., the treatment of losses differs substantially by country. Key points:

• Each jurisdiction sets its own rules for recognizing capital losses, offsetting gains, limits against ordinary income, and carryforward periods.
• Some countries allow carryback (apply a loss to prior years), others restrict carryforwards to a limited number of years, and tax rates for gains vary.
• Wash‑sale equivalents or anti‑avoidance rules may exist in other countries.
• If you trade on global markets or hold assets across borders, consider the need to file multiple tax returns and account for foreign‑source income and foreign tax credits.

If you’re not in the U.S., ask a local tax advisor or check your tax authority’s official guidance.

Examples (worked numeric examples)

Examples help illustrate the mechanics described above. In each example below we keep the math simple.

Example 1 — Using losses to offset gains

• You sold Stock A (long‑term) at a $5,000 loss.
• You sold Stock B (short‑term) at a $3,000 gain.

Step 1: Net short‑term: short‑term gain = $3,000. Step 2: Net long‑term: long‑term loss = $5,000. Step 3: Combine: $5,000 long‑term loss offsets $3,000 short‑term gain, producing a $2,000 net capital loss (character depends on remaining amount; in this case net loss overall).

Result: You have a $2,000 net capital loss. You may deduct that $2,000 against ordinary income (within the $3,000 limit). No carryforward remains.

Example 2 — Deducting remaining losses against ordinary income

• You have no capital gains this year and have aggregate realized losses of $9,000.

Step 1: You can deduct $3,000 of those losses against ordinary income this year. Step 2: $6,000 remains as a carryforward.

Result: You reduce current taxable income by $3,000 this year, and can use the remaining $6,000 in future years subject to the same annual rules.

Example 3 — Carryforward usage

• Year 1: $12,000 net capital loss. Deduct $3,000. Carryforward $9,000.
• Year 2: Realized capital gain $4,000.

Step 1: Carryforward $9,000 offsets Year 2 $4,000 gain fully, leaving $5,000 carryforward. Step 2: You may also deduct up to $3,000 of any remaining net loss against ordinary income in Year 2 (if any remained).

Result: The initial loss continues to benefit you across years until exhausted.

Recordkeeping and timing

Good recordkeeping makes tax reporting accurate and defensible. Here’s what to keep and for how long:

• Essential records to retain:

  • Trade confirmations for each buy and sell (date, quantity, price, fees).
  • Year‑end brokerage statements and Form 1099‑B.
  • Records of reinvested dividends and corporate actions (splits, mergers, spin‑offs).
  • Documentation of gifts, inheritance valuations, and basis calculations.
  • Records of wash‑sale adjustments and lot identifications.

• How long to keep records: The general recommendation is to keep records for at least three years from the date you file the return that includes the transaction, but many advisors recommend keeping basis and supporting records for as long as you hold the investment plus at least three years after you sell (longer if carryforwards remain).

• Determining holding periods: Holding period starts the day after you acquire the shares and ends on the day you sell. Use trade confirmations to prove acquisition dates when choosing lots.

• Why records matter: Accurate records justify basis, holding periods, and carryforwards in case of IRS or state audit. They also simplify tax preparation and let you avoid overpaying taxes.

Bitget note: If you trade on Bitget and use Bitget Wallet for holdings, export transaction histories and confirmations regularly. Maintaining clear CSVs or exported reports speeds reconciliation and supports Form 8949 completion.

Cryptocurrency and other asset comparisons (brief)

• Many tax authorities, including the U.S. IRS, treat cryptocurrencies as property for tax purposes. As a result, realized losses on crypto you sell are generally treated like capital losses from stocks — they can offset gains and be subject to the $3,000 annual ordinary‑income offset limit.

• Special considerations for crypto:

  • Frequent trades, forks, airdrops, and cross‑chain transfers create complex basis tracking needs.
  • Many exchanges and wallets may not provide complete basis reporting; guard your records carefully.

• For crypto traders, Bitget Wallet can help record on‑chain transactions and export histories to support your tax filings. Always confirm local tax treatment for crypto with a tax professional.

Common FAQs

Q: Do I owe tax on an investment loss? A: No — a loss does not create a tax liability. Instead, realized losses reduce taxable gains and — up to $3,000 per year in the U.S. — reduce ordinary income. Excess losses carry forward.

Q: Can I deduct losses on stocks I still hold? A: No. Only realized losses (from sales or disposals) are recognized. Paper losses on holdings you still own are unrealized and do not affect current taxes.

Q: What if my broker reports a different basis than I have? A: Reconcile their Form 1099‑B with your records. If the broker’s basis is wrong or missing, report the correct basis on Form 8949 and attach an explanation or keep supporting evidence in case of audit.

Q: How does the wash‑sale rule apply to ETFs or options? A: The wash‑sale rule can apply to ETFs and options if the replacement is substantially identical. For options, writing or buying options that replicate ownership can trigger complex rules. When in doubt, wait 31 days or choose non‑identical replacements and consult a tax advisor.

Q: Are losses in IRAs deductible? A: No. Losses inside IRAs are not deductible on your personal return. Selling a losing holding inside an IRA generally won’t produce a tax deduction.

Q: If my stock became worthless, when can I claim the loss? A: The IRS treats worthless securities as sold on the last day of the tax year. You can claim the loss in that year, subject to ordinary capital loss rules.

Practical considerations and when to consult a tax professional

Behavioral and practical considerations when deciding whether to sell a losing position for tax reasons:

• Investment rationale first: Tax considerations are secondary to whether a position fits your investment plan. Don’t sell solely for tax reasons if the security remains aligned with your objectives.
• Timing and tax drag: Selling to harvest losses may reduce short‑term taxes but introduce trading and tracking risk. Consider portfolio drift and transaction costs.
• Wash‑sale risk: A common pitfall for DIY investors. If you intend to repurchase quickly, you may inadvertently disallow the loss.
• State taxes and cross‑border issues: State rules and international tax situations add complexity. If you have sizable losses, carryforwards, retirement accounts, or cross‑border holdings, consult a CPA or tax professional.

When to consult a professional:

• Large or complex capital losses, carryforwards, or multi‑jurisdictional trades.
• Complex instruments like options, futures, or structured products.
• Disputed broker reporting or basis issues.
• Interactions between taxable accounts and IRAs that could trigger wash‑sale consequences.

References and further reading

• IRS Topic No. 409 — Capital Gains and Losses (official IRS guidance)
• Instructions for Form 8949 and Schedule D (IRS forms and instructions)
• Resources on wash‑sale rules and basis reporting from reputable tax authorities and tax software firms
• Educational content on tax‑loss harvesting and capital‑loss rules from major custodians and financial educators

(Readers should consult the latest IRS guidance and a licensed tax professional for specific situations.)

Practical next steps and Bitget resources

• If you trade on Bitget or hold crypto in Bitget Wallet, export your transaction history for the tax year and reconcile cost basis before preparing tax forms.
• Consider Bitget Wallet for organized on‑chain recordkeeping and secure storage of key transaction receipts.
• For investors unsure about wash‑sale exposure or complex situations, consult a qualified CPA or tax advisor. Bitget users with active taxable trading may find it efficient to work with advisors who accept exported broker and wallet reports.

Explore more about managing taxable investments and using Bitget tools to simplify recordkeeping and tax reporting.

Further reading note: The policy environment around retirement accounts and taxable access can change. As of January 2025, according to MarketWatch, proposals to alter 401(k) withdrawal rules were under public discussion — an example of how retirement and taxable account rules can evolve and affect where investors should hold assets for tax efficiency.

More useful guidance, alerts, and product tips are available through Bitget help resources and Bitget Wallet documentation — consider exporting reports early and organizing them per tax lot to make Form 8949 preparation faster.

abstractContent: This guide answers “do you pay taxes on stocks that lost money?” with clear rules on realized vs unrealized losses, reporting, wash‑sale consequences, tax‑loss harvesting, examples, special cases, and how Bitget tools can help organize records.