Why Can't I Deduct Those Losses: The Double or Quadruple Whammy of Your Losses in the Stock Market

What Do Stock Market Losses Mean For Your Tax Return?

Limited Reduction of Income on Your Tax Return for This Year

The smoke is rising from his ears and he wants to know why he can't use his stock market losses to offset his income on his income tax return.  Yeah, it is a bad deal. To add to salt to a festering wound you are limited to taking capital losses, like losses on your stock trades, up to a net of $3,000.  So net means you can use actual losses to offset any actual gains you had on trades this year plus up to $3,000 of losses.  When you have lost over $3,000 of value that is not enough.

What about the rest of those actual losses?  You can carry those forward and use them in future years.  But remember those are only the actual losses.  

Actual Losses Only

Actual losses are losses from positions you have closed out of.  In other words losses from stock that you have sold.  If you still hold the stock, now a loss position but an active position, those are not yet actual losses you can report on your tax return.  It is only the losses from stock you have sold.

Wash Sale Limitations

Before you think about it, no you cannot sell a position and reenter it within 30 days.  If you do it is a wash sale and not typically deductible on your tax return.  So even if you want to stay in a position for some reason you can't sell to take the loss and then get right back in. You will loose the loss.

No Losses From Retirement Accounts

And no you cannot deduct losses from your retirement accounts on your tax return. You see those funds were never taxed and you do not get to deduct losses just as you don't pay taxes on gains until you take the money out and then they are taxed at ordinary income tax rates rather than the favorable capital gains tax rates.

So that is actually four whammies or a quadruple whammy from your losses in the stock market.  No one likes losses and especially when they are compounded by the tax laws but you need to know how those losses will be treated from a tax standpoint.  It is better to know what to expect now so you can make informed decisions rather than be surprised later.

Of course, if you are classified as Qualified Trader then there are a different set of rules for you and your trading activity.

I would like to help you succeed with your financial plans and with your businesses. Feel free to use my contact information below to contact me to discuss what I can do for you. Yes, we can discuss strategy to deal with those stock market losses.

Jeff Haywood, CPA
The CPA Superhero

Follow the CPA Superhero on Twitter:

My posts contain general information that does not fit every situation and is not all inclusive. When it comes to your tax situation, remember, everything depends on all your facts and circumstances. So contact me to arrange a time to discuss your specific facts and circumstances and what you want to accomplish. 

The Sexy Way To Wealth

One of the best stories about wealth is from a high-flying friend back in the day and about his not so high-flying but wealthy dad.  My friend would make over a million dollars in a few years but had nothing to show for it.  However, the real story is the one he told me about his dad, who is a millionaire who never made over $50,000 a year.  His newly retired dad and his wife raised a few kids sent them to college and along the way accumulated over a million dollars in accessible funds.  How?

His dad followed a tried a true formula.  He saved money out of every paycheck and also put money into his retirement accounts.  Stop me if you've heard this before, but it does work and it is actually very powerful not only financially but personally.

Anything Worth Doing Is Difficult

In reality this strategy is difficult but so is anything worth doing.  The main deterrent is in the mind.  When you are young you want things and you want them now.  The problem is in waiting. What do you want?  You want a nice place to live in a cool neighborhood.  You want a cool car and you definitely want to look good and stylish.  You want all the latest tech gadgets and entertainment centers.  In addition you want to go out and do things with other people, eat in cool places, hangout in cool bars, go to festivals and events.  The problem is, on the average salary you have to live with moderation.  You have to say no to yourself and that does not seem like fun.

Develop a Plan and Recognize It's Value

While you do have to say no to yourself, you can do it with a plan that you control and that gives you a bright outlook for the future.  It means setting a budget that includes setting aside money into a savings account or investment account in addition to funding a retirement account.  Once you put in those restraints figure out how much of your income you want to allocate to housing, a car, entertainment, gadgets, clothes, the unknown, etc.  Then deal with your wants.

Say no to yourself but develop a plan to get what you want.  You will probably realize that what you want is outside your means at this time.  First, feel good about two things, living in control of your own financial life and having a plan to reach your goals.  Second, develop and work with plans on an ongoing basis to get to the things you want.

For most this will require both saying not now and only when I reach certain accomplishments. Saying not now means you won't buy or do something until you have the right circumstances.  Not only is this financially sound but it is also a means to develop maturity.  That maturity is such a valuable trait in and of itself that it will make money for you help you to obtain the things you want faster.  Why do I say that?   People want to do business with mature people. Would you rather have an impulsive business partner that can't say no or a mature person who can control their own life and your business.  If a person can control their own life they can also control a business venture and vice a versa. Take pride in investing in and developing yourself as valuable asset.

While in reality you may have to just flat out say no at this time to something because you can't afford it.  Who really knows what the future will hold.  With a good plan and in developing your own value what seems out of reach now may begin to look more attainable as you grow.  For example, if you want a Mazzerati, you will likely need to develop some very successful businesses first.  It can be done but usually with the development of personal skills first or along the way.

So decide you won't indulge yourself with something you want until you can pay for it.  Then develop a plan to get the money to pay for it by saving and investing.  Investing might be in your own business that can generate higher returns than the stock market and give you the ability to influence how it turns out.  Just having a plan will empower you with a sense of control instead of dealing with the traps that come with a sense of entitlement and the debts that come with a lifestyle you can't afford (yet).  Plan and work for it and develop real wealth, not just material wealth but also personal wealth, the wealth that is from becoming a person with real valuable skills and traits.

Recognize The Value of What You Are Becoming - Sexy

Envision this, an investor asks you and one of your peers why he should hire you to develop his business idea.  All your peer has is looks, education, fancy clothes, car, gadgets, etc. and the debts that go along with it.  You on the other hand can offer the ability to develop and execute a plan and you can describe in detail your financial plan and how you have been executing it.  In addition, you have a better idea of what questions to ask about the business idea so as to develop a plan or proposal since you have experience with developing plans and seeing them through.  Since you know enough to ask the right questions you can use the information you obtain to put together a plan or proposal for developing this business idea and likely you can close the deal because on your value and your coherent plan.

You probably can also see that if you have successfully put together a financial plan and are seeing it through others might invest in your business idea and have confidence in you.  Yes, the value of people having confidence in you is much greater than someone admiring the clothes you wear or where you live.

Understand value.  Maturity has a real value that projects into the future. Cool things along with debt have limited value and it also projects into the future but in a negative way.  Self-control, and the ability to manage and implement a plan has greater value than a stylish clothes that you can't afford.  So as you develop your personal value then your plan to get what you want becomes more reachable in your mind and in the minds of others.  Yes, time and investment in yourself translates into real wealth.  Perhaps saving money does not seem sexy but an investment in yourself sure does.  Also, your plan then becomes sexy because you have a real attainable vision for your future and the skills to make it a reality.

Get to Having Things Work for You

As you grow your savings and investments you will be able to put it work for you.  How does that feel?  You know the feeling of working for someone or something else.  Now you get to turn the tables and have your investment in yourself work for you.  Do you know what that will do for your confidence? Because now things are working for you, both money and your skills and perhaps a business or businesses, your confidence will grow and will show when you talk to others and it will make you attractive as a person and as a business asset.

It's Actually All About You and Not Money

And you thought it was about money.  In reality it is about you and your value. The things you have and do don't make you sexy but what you are makes you sexy.  So be successful and sexy by investing in yourself and your future by developing and implementing plans including an ongoing and developing financial plan.

I would like to help you succeed with your financial plans and with your businesses.  Feel free to use my contact information below to contact me to discuss what I can do for you.

Jeff Haywood, CPA

The CPA Superhero

Follow the CPA Superhero on Twitter:

My posts contain general information that does not fit every situation, they are not all inclusive, and as always for your tax situation everything "depends on facts and circumstances."  In addition, the information/IRS requirements are always subject to change.  So call me to talk about your specific facts and circumstances and what you want to accomplish.

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