The Under 40 Financial Planning Guide: Take a Capital Loss

As we discussed above, capital investments are investments in stocks, bonds, mutual funds, homes, and other similar items. If you make a profit on these investments it's called a "capital gain"; a loss is called a "capital loss."

If you have made a capital investment that is a loser, you can sell the loser and lock in a loss. You can use this capital loss to offset any capital gains. Even if you have little or no capital gains to offset, you can offset up to $3,000 per year of ordinary income.

For example: If you bought stock in Bedrock Rubble and its value has decreased to $2,800 less than you paid for it, you can sell Bedrock Rubble and take a capital loss of $2,800. You can use the $2,800 to offset your taxable ordinary income.

If you still believe that Bedrock Rubble is a good investment, you can buy it back after 30 days. If you buy it back during the 30day period, the IRS treats you as if you never sold it in the first place. Your risk is that the stock goes up during the 30-day period.

In order to recognize a loss, you have to sell your stock before December 31 of the tax year. Also, you can offset an unlimited amount of capital gains, but if you have more than $3,000 that can be used to offset ordinary income, you can use the remainder in later years, with the same limitations.