If I Lost in the Stock Market, Do I Still Have to File?

This week we hear from Shelley in Reisterstown:

Dear Alice,

I lost a lot of money when I sold some stocks this year and I didn’t have any other income. Since I don’t owe any taxes I don’t even have to file a return, right?

Shelley

_________

Dear Shelley,

I’m sorry to hear about your losses in the market this year. Unfortunately, you will have to file a return this year despite the fact that you only incurred losses. The first reason is because IRS doesn’t have any information about what you originally paid for the stocks, so all they know is you received the proceeds from the sale of your stock. The only way they know that you have a loss is if you report it.

Every year, IRS computers do a crosscheck with all the forms payers such as brokerage houses and employers send to the IRS with tax returns that have been filed using your social security number. Your brokerage house sent you a form 1099-B reporting the stock sales to both you and the IRS; if you don’t file a return IRS is going to send you a CP-2000 letter stating they have a mismatch in their system and ask you to pay tax on the gross sales instead of the difference between what you sold and what you paid for the stock. Yikes! It’s better file it as soon as possible to avoid the hassle later.

While that alone is reason to file a return, it’s really in your best interest to file the return. When one sells stocks or bonds and recognizes a capital loss, you are only allowed to claim $3,000 a year in capital losses. While this may not seem like much of a benefit to you this year since you didn’t have any other income, keep in mind that you get to carry forward any remaining losses over $3,000 to subsequent years. If next year you sell more stock and actually have capital gains, in most cases you can offset your capital gains with any capital losses you carry forward. On the other hand if you don’t have any other capital gains or losses next year you can at least offset your ordinary income (wages, interest income etc.) with up to $3,000 of capital losses and again carry forward the balance of your losses. If you don’t file you can’t carry it forward.

Many Happy Returns!

Alice A. Reid, EA

Disclosure: The nature of taxation is complex and information used to complete your personal tax return is dynamic – meaning that one area of your tax return can affect others, while our goal is to provide you with good general information, IRS may require certain documentation or substantiation to support any tax position you take on your tax return. If your issue is complex we recommend you talk to a tax professional who can better understand your entire tax situation and advise you appropriately.