Is my Investment Loss Deductible for my Taxes?

Is my Investment Loss Deductible for my Taxes?
You can’t turn on a TV, Radio or Computer these days without hearing about the economy and the plummeting values of investments. If you’ve been a victim of this unstable economy you might find yourself wondering if your overall losses for the year in the value of your investment and retirement accounts will be deductible on your tax return. The answer, like most things related to tax deductions, is yes and no.

Whether an investment loss is deductible or not is dependent on if you have a realized loss that is recognized or a realized loss that is not recognized. What’s the difference you ask? The difference is based on whether you held onto your investments or not.

If you held onto your investments and they now have lower values you now have a realized loss that is not recognized which is not deductible for tax purposes. Technically, over time your investments hopefully will grow in value and you then have a realized gain that is not recognized until you sell your investments. The operative word being un- unrecognized (or not recognized) – which means you didn’t actually lose or gain in reality because your investments can still go up and down in value as long as you didn’t sell them.

Now if you decided to sell off some of your investments and you sold them for less than you paid for them, you then have a realized capital loss that is recognized and it is deductible for tax purposes. The operative word being recognized because you have now realized all that you can from that particular investment by liquidating it and it will no longer have the potential to go up and down so it becomes recognized. The transaction is complete.

According to IRS Publication 544 “your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Recognized gains must be included in gross income. Recognized losses are deductible from gross income.” The yearly limit on the amount of capital loss you can deduct above capital gain against ordinary income is $3,000 per year ($1,500 if you are married and file a separate return). The remaining loss will be handled as a carryover and deducted per limits over future years.

Investments that are held in retirement funds are not as easily liquidated due to plan restrictions, age restrictions and tax penalties.

Let’s hope that the economy improves in the near future!

I hope you're enjoying Just the Basics on the Taxing Subject of Taxes!

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