How to Deduct Investment Losses on Your Taxes

To deduct investment losses on your taxes, you report each sale on Form 8949, net your losses against your capital gains on Schedule D, and then subtract up to $3,000 of any remaining net loss from your ordinary income ($1,500 if you file married filing separately).¹ Anything left over carries forward to future years and never expires. The mechanics are straightforward once you know the netting order and the traps that can disqualify a loss.

Which Losses You Can Actually Deduct

A capital loss happens when you sell an investment for less than you paid, including transaction costs. Stocks, bonds, mutual fund shares, and investment real estate all qualify. Personal-use property does not. If you sell your home or car at a loss, the IRS will not let you deduct it.²

Every capital loss is either short-term or long-term based on how long you owned the asset:¹

Short-term losses come from assets held one year or less. They first offset short-term gains, which are taxed at your ordinary income rate.
Long-term losses come from assets held more than one year. They first offset long-term gains, which are taxed at 0%, 15%, or 20% depending on income.

The classification matters because a short-term loss canceling a short-term gain eliminates tax at your full marginal rate, while a long-term loss canceling a long-term gain eliminates tax at the lower capital gains rate. Same loss, different value.

The Netting Rules and the $3,000 Cap

You don’t choose which gains your losses offset. The IRS requires a specific order. Short-term gains and losses combine first, producing a net short-term figure. Long-term gains and losses combine separately, producing a net long-term figure. If one category shows a net loss and the other a net gain, the loss then offsets the gain in the other category.

Once the netting is done, either you have a net capital gain (taxable) or a net capital loss (deductible against ordinary income up to the annual limit). The cap is $3,000 for single filers, head of household, and married couples filing jointly. Married filing separately gets $1,500.¹

Two quick examples make the arithmetic concrete. With $10,000 in losses and $8,000 in gains, your net loss is $2,000, all deductible because it’s under the cap. With $20,000 in losses and $5,000 in gains, you offset the gains entirely, deduct $3,000 of the remaining $15,000 against ordinary income, and carry the other $12,000 forward.

How the Carryover Works

Any net loss above the annual cap carries into the next tax year with its original character intact. A carried-over short-term loss remains short-term; a carried-over long-term loss remains long-term. You apply it the same way you applied the original: first against same-type gains, then against the other type, then up to $3,000 against ordinary income.¹ There is no expiration. A large loss from a market crash may take years to use, but it stays available as long as you keep filing.

One exception is worth knowing. Unused carryovers cannot pass to a surviving spouse or an estate. The loss can only be claimed on the decedent’s final return, still capped at $3,000.³ For older taxpayers sitting on a large carryover, that’s a real planning consideration.

The Wash Sale Rule

The biggest way people lose an investment loss deduction is the wash sale rule. If you sell at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the IRS disallows the loss for that year.⁴ The full window is 61 days: 30 before, the sale day, and 30 after.

A disallowed loss isn’t gone forever in most cases. The IRS adds the disallowed amount to the cost basis of the replacement shares, so you eventually recognize the loss when you sell those replacement shares. The holding period of the original shares also carries over.⁵

The rule covers more than repurchasing the same stock. Acquiring an option or contract to buy the security counts. So does buying the security in your IRA or Roth IRA within the window.⁵ That last one catches many people. Selling a stock at a loss in your taxable account and rebuying it in your IRA within 30 days triggers a wash sale, and when the replacement sits in an IRA the basis adjustment doesn’t apply, so the loss can be permanently destroyed. The rule also reaches across your spouse’s accounts. Your broker tracks wash sales within a single account; you are responsible for tracking them across every account at every institution, including your spouse’s.

What counts as “substantially identical” isn’t spelled out in a bright-line list. Shares of the same company clearly qualify. Two different companies in the same industry generally don’t. Selling one S&P 500 index fund at a loss and buying a fund tracking a different index generally avoids the rule because the portfolios differ.⁵

Cryptocurrency sits outside this rule for now. As of 2026, digital assets are classified as property rather than stock or securities, so IRC Section 1091 does not explicitly apply. Selling Bitcoin at a loss and repurchasing it the same day does not trigger a wash sale under current law. Legislation to close this gap has been proposed but not enacted, and same-day repurchases may still draw scrutiny under broader anti-abuse doctrines.

Special Situations

Worthless Securities

If a stock or bond becomes completely worthless, you don’t need to find a buyer. The IRS treats a worthless security as sold for $0 on the last day of the year it became worthless.⁶ On Form 8949, use December 31 as the sale date and $0 as the sale price. The hard part is pinning down the correct year. A company still in bankruptcy or trading at a fraction of a cent may not qualify yet; the security must have no liquidation value and no reasonable expectation of recovery. If you claim it in the wrong year, the IRS can disallow it. You get seven years from the original due date of the return to file an amended return claiming the deduction, compared with the usual three.

Inherited Investments

Inherited investments get a basis reset to fair market value on the date of death, or an alternate valuation date up to six months later if the executor elects it on an estate tax return.⁷ 8 If you later sell for less than that stepped-up basis, the loss is automatically long-term regardless of how long you held it. It first offsets long-term gains rather than the more heavily taxed short-term ones.

Section 1244 Small Business Stock

Most investment losses are capital losses, capped at $3,000 of ordinary income offset per year. Section 1244 creates an exception for certain small business stock. If you bought the stock directly from a qualifying domestic corporation with total capitalization of $1 million or less at issuance, and the corporation earned more than half its revenue from active operations, you can treat up to $50,000 of losses on that stock as ordinary losses, or $100,000 if married filing jointly.⁹ Ordinary loss treatment offsets wages and business income dollar for dollar without the $3,000 cap. You must have been the original holder; secondary-market shares don’t qualify.

Retirement Accounts

You cannot deduct losses on investments held inside a 401(k), traditional IRA, Roth IRA, or other tax-advantaged retirement account.¹⁰ Tax-loss harvesting only works in taxable brokerage accounts. And if you own the same stock in both a taxable account and an IRA, buying more in the IRA within 30 days of selling at a loss in the taxable account triggers a wash sale.⁵

Reporting the Loss on Your Return

Two forms do the work: Form 8949 and Schedule D, both attached to your Form 1040.

Form 8949

Form 8949 lists every individual sale. For each transaction you report the date acquired, date sold, sale price, and cost basis. Part I handles short-term transactions; Part II handles long-term.¹¹ Adjustment codes flag wash sales and other basis corrections. Every transaction on the Form 1099-B from your brokerage needs to appear here. Starting with the 2025 tax year, Form 8949 also includes dedicated boxes for digital asset transactions, and exchanges may issue Form 1099-DA alongside the traditional 1099-B.

Schedule D

Totals from Form 8949 flow to Schedule D, which runs the netting calculation, applies the $3,000 cap on any net loss, and sends the final figure to line 7 of Form 1040.¹² That reduces your adjusted gross income, which can ripple into other deductions and credits tied to AGI.

If you have a carryover from a prior year, use the Capital Loss Carryover Worksheet in the Schedule D instructions to figure the amount entering the current year.¹ Hold on to prior-year Schedule D forms so you can track your running carryover balance, especially if the loss is large enough to span multiple filing seasons.

1
Internal Revenue Service. Topic No. 409 Capital Gains and Losses
2
Internal Revenue Service. What if I Sell My Home for a Loss?
3
Internal Revenue Service. Decedent Tax Guide
4
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
5
Internal Revenue Service. Publication 550 – Investment Income and Expenses
6
eCFR. 26 CFR 1.165-5 – Worthless Securities
7
Internal Revenue Service. Publication 551 – Basis of Assets
8
Internal Revenue Service. Gifts and Inheritances
9
Legal Information Institute. Section 1244 Stock
10
Internal Revenue Service. What if My 401(k) Drops in Value?
11
Internal Revenue Service. Instructions for Form 8949
12
Internal Revenue Service. 2025 Schedule D (Form 1040)