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.
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FAQs
The advantage of selling stocks at a loss is that you can deduct these capital losses on your taxes. You're allowed to do this when your capital losses (the amount you lost that year on investments you sold) exceeds your capital gains (the amount you made that year on investments you sold).
What happens if I sell my stocks at a loss? ›
Realized capital losses from stocks can be used to reduce your tax bill. You can use capital losses to offset capital gains during a tax year, allowing you to remove some income from your tax return.
Can you write off 100% of stock losses? ›
If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.
Should you sell at a loss and buy back? ›
If you sell a stock at a loss and quickly buy it back or keep investing in the stock after buying it back, the IRS generally won't allow you to write off the loss on your federal tax return. Let's consider an example.
Should I cut my losses and get out of the stock market? ›
The golden rule of stock investing dictates cutting your losses when they fall 10 percent from the price paid, but common wisdom just might be wrong. Instead, use some common sense to determine if it's time to hold or fold. Diversification.
Is it worth selling at a loss? ›
Stocks sold at a loss can be used to offset capital gains. You can also offset up to $3,000 a year of ordinary income. A silver lining of investment losses is that you can lower your tax liability as a result.
Do I get a tax break if I sell stock at a loss? ›
Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.
Why is capital loss limited to $3,000? ›
The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.
What happens if you lose 100% of your stock? ›
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless.
Will I get a tax refund if my business loses money? ›
If you open a company in the US, you'll have to pay business taxes. Getting a refund is possible if your business loses money. However, if your business has what is classified as an extraordinary loss, you could even get a refund for all or part of your tax liabilities from the previous year.
Here's how you can bounce back.
- The markets can sometimes shift rapidly. ...
- Learn from your mistakes.
- Traders need to be able to recognize their strengths and weaknesses—and plan around them. ...
- Keep a trade log.
- On a related note, you can track your trading activity to pinpoint what has worked well and what hasn't in the past.
While selling stocks during a market downturn might make you feel better temporarily, doing so reactively because stocks are tumbling isn't a good long-term investment strategy. Volatility is a normal part of investing in the stock market, so occasional market selloffs should be expected.
How to avoid a wash sale? ›
To avoid a wash sale, you could replace it with a different ETF (or several different ETFs) with similar but not identical assets, such as one tracking the Russell 1000 Index® (RUI). That would preserve your tax break and keep you in the market with about the same asset allocation.
What is the 7% rule in stocks? ›
However, if the stock falls 7% or more below the entry, it triggers the 7% sell rule. It is time to exit the position before it does further damage. That way, investors can still be in the game for future opportunities by preserving capital. The deeper a stock falls, the harder it is to get back to break-even.
What is the 7% stop loss rule? ›
To make money in stocks, you must protect the money you already have. That brings us to the cardinal rule of selling. Always sell a stock it if falls 7%-8% below what you paid for it. This basic principle helps you always cap your potential downside.
Why do 90% of people lose money in the stock market? ›
Staggering data reveals 90% of retail investors underperform the broader market. Lack of patience and undisciplined trading behaviors cause most losses. Insufficient market knowledge and overconfidence lead to costly mistakes.
Do I get money back from stock losses? ›
If your net losses in your taxable investment accounts exceed your net gains for the year, you will have no reportable income from your security sales. You may then write off up to $3,000 worth of net losses against other forms of income such as wages or taxable dividends and interest for the year.
Should I sell my stocks at a loss to pay off debt? ›
Generally speaking, you want to try to avoid selling stocks to pay off debt. But in some cases, simple mathematics pushes the needle in that direction. For example, if you have a lot of debt but it's at a 0% interest rate, there's really no hurry to get it paid off.
Do I have to report stocks sold at a loss? ›
If you experienced capital gains or losses, you must report them using Form 8949 when you file taxes. Selling an asset, even at a loss, has crucial tax implications, so the IRS requires you to report it. You'll receive information about your investments from your broker or bank on Forms 1099-B or 1099-S.
