Yes, you have to report stock losses on your taxes, and you should want to. Your broker already sent the sale to the IRS on Form 1099-B, so the agency knows the transaction happened. Leave it off your return and the IRS can treat your cost basis as zero, turning a losing trade into a phantom gain on paper. Report it correctly and the loss offsets your capital gains dollar for dollar, with up to $3,000 of any leftover loss coming straight off your ordinary income.
The Loss Has to Be Realized
A stock that dropped 40% in your account is not a deductible loss. The IRS only recognizes a loss when you actually sell or otherwise dispose of the asset. Hold the shares and the decline is an unrealized paper loss with no tax consequence. Sell them and the loss becomes real, which is what creates both the reporting obligation and the tax benefit.
Some investors sit on a losing position for years hoping it recovers, not realizing they could sell, book the loss, and put the proceeds into something else. That approach, often called tax-loss harvesting, works because the tax system runs on completed transactions rather than portfolio valuations.
What Reporting a Loss Actually Does for You
Losses are useful because of how the IRS nets them against gains. Short-term losses (from assets held one year or less) first offset short-term gains. Long-term losses (from assets held more than one year) first offset long-term gains. If one category ends up net negative and the other net positive, the two are then netted against each other.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses
This ordering matters. Short-term gains are taxed at ordinary income rates that can reach 37%. Long-term gains are taxed at 0%, 15%, or 20% depending on your income. A short-term loss that erases a short-term gain saves more tax than the same loss canceling a long-term gain taxed at 15%.
When you still have a net capital loss after all the netting, you can deduct up to $3,000 of it against ordinary income in that year, or $1,500 if you file Married Filing Separately. Anything above that limit carries forward to future years indefinitely, keeping its short-term or long-term character and re-entering the netting process each year.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses Someone who lost $50,000 in a single year with no offsetting gains could take more than 15 years to work through it at $3,000 a year, which is why finding gains to absorb the loss is the more efficient use of it whenever possible.
One boundary worth knowing: losses on personal-use property, such as your home or your car, are not deductible. Only losses on property held for investment or used in a trade or business qualify.2Internal Revenue Service. Losses (Homes, Stocks, Other Property)
What Happens If You Don’t Report
Your broker files Form 1099-B with the IRS reporting the proceeds of every sale you made. The IRS’s Automated Underreporter system matches those broker filings against your return, and when the numbers don’t line up it sends a CP2000 notice proposing to adjust what you owe.3Internal Revenue Service. Topic No. 652, Notice of Underreported Income – CP2000
The painful part is how the IRS calculates the proposed adjustment. If it has your sale proceeds but no cost basis on your return, the system may treat the basis as zero and count the entire sale amount as taxable gain. Sell $80,000 worth of stock at a $10,000 loss, skip the reporting, and you can end up with a notice claiming you owe tax on $80,000 in gains. You can respond with records to fix it, but the process takes months and the burden of proof sits with you.
Reporting a losing year protects you even when you had no gains to offset. It starts the statute of limitations running on that return, and it preserves the capital loss carryover you’ll use in future years. A loss that never got reported is a loss you can’t carry forward.
How to Report the Loss
Every sale goes on Form 8949, which has separate sections for short-term and long-term transactions. The totals from Form 8949 flow to Schedule D, where the netting happens, and the final net figure carries to your Form 1040.4Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets If your broker already reported your cost basis to the IRS and you have no corrections, you can sometimes skip Form 8949 and put the totals directly on Schedule D.5Internal Revenue Service. 2025 Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets
You are ultimately responsible for the accuracy of the basis figure, not the broker.6Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions Cryptocurrency sales work the same way, reported on Form 1099-DA rather than 1099-B but subject to the same netting rules, the same $3,000 limit, and the same holding-period rules as stock.7Internal Revenue Service. Digital Assets
Fixing an Incorrect Cost Basis
Brokers sometimes report the wrong basis, particularly on shares acquired through corporate actions, dividend reinvestments, or transfers from another firm. Don’t ignore a bad number. Enter the broker’s reported basis in Column (e) of Form 8949, put adjustment code “B” in Column (f), and enter the correction amount in Column (g). That signals to the IRS that you spotted the discrepancy and are supplying the right figure.8Internal Revenue Service. Instructions for Form 8949 (2025)
The Wash Sale Rule Can Undo Your Loss
You cannot sell a stock at a loss and immediately buy it back to lock in the deduction. The wash sale rule disallows the loss if you purchase the same or a substantially identical security inside a 61-day window: the 30 days before the sale, the sale date itself, and the 30 days after.9Office of the Law Revision Counsel. 26 US Code 1091 – Loss From Wash Sales of Stock or Securities
In a normal taxable account, a disallowed loss isn’t destroyed. It gets added to the cost basis of the replacement shares, deferring the tax benefit until you sell those shares later. The IRS is postponing the deduction, not eliminating it.
The IRS has never published a bright-line test for “substantially identical.” Buying back the exact same stock clearly triggers the rule, and so does buying an option or contract on the same stock. Selling an S&P 500 index fund and buying a Russell 1000 fund is generally considered safe. Selling one S&P 500 fund and buying another provider’s S&P 500 fund sits in murkier territory, and conservative advisors tend to steer clear of that inside the 61-day window.
The IRA Trap
The wash sale rule applies across all your accounts, including retirement accounts. Sell a stock at a loss in your taxable brokerage account, then buy the same stock in your IRA within 30 days, and the wash sale triggers. Because the disallowed loss would normally be added to the replacement shares’ basis, and basis adjustments inside an IRA produce no tax benefit, the loss simply disappears. It’s one of the most expensive avoidable mistakes in this area, and a calendar check prevents it.
Carryovers Don’t Live Forever
Capital loss carryovers stay with the taxpayer. They do not pass to a surviving spouse, heirs, or an estate, and they end at death. An investor sitting on a large accumulated carryover has a reason to think about whether recognizing gains during their lifetime to use up the carryover produces a better result than letting it expire. It’s a planning question that tends to surface too late.