Can You Write Off Investment Losses on Your Taxes?

You can write off investment losses on your taxes, but only after running them through the netting process the IRS requires. Losses first cancel out your capital gains for the year. If losses still exceed gains, you can deduct up to $3,000 of the excess against ordinary income like wages and interest, or $1,500 if you’re married filing separately.¹ Anything left carries forward indefinitely into future tax years.²

You Have to Actually Sell

Watching a stock drop doesn’t get you a deduction. The loss has to be realized, meaning you sold, exchanged, or otherwise disposed of the asset for less than your adjusted basis (generally what you paid plus commissions).³ While you still hold the position, the loss exists on paper only and the IRS does not recognize it.

For most individual investors, the qualifying assets are stocks, bonds, mutual fund shares, exchange-traded funds, and digital assets like cryptocurrency. Collectibles such as coins, artwork, and antiques also count as capital assets.⁴

Personal-use property is out. If you sell your car or your home at a loss, you cannot write that off. The IRS requires the asset to have been held for investment or used in a trade or business.⁵

How the Netting Works

You cannot simply add up your losses and subtract them from your paycheck. Federal law requires losses and gains to be paired first, and the holding period matters.¹

Short-term losses (assets held one year or less) offset short-term gains. Long-term losses (assets held longer than one year) offset long-term gains. If one category has a net loss and the other a net gain, the two results are combined. The distinction matters because short-term gains are taxed at your ordinary income rate, while long-term gains are taxed at lower rates. A short-term loss used against a short-term gain saves more tax per dollar than the same loss used against a long-term gain.

The $3,000 Ceiling

After the netting, whatever loss remains can offset up to $3,000 of ordinary income per year. The cap is the same for single filers and joint filers, and it drops to $1,500 each for married taxpayers filing separately.⁶ The figure has been $3,000 since 1978 and is not adjusted for inflation. It still reduces your adjusted gross income directly, which can nudge you into a lower bracket or preserve eligibility for income-based credits.

Carrying the Rest Into Future Years

Losses beyond the $3,000 you can use this year do not vanish. The excess carries forward, keeping its character: short-term stays short-term, long-term stays long-term.² Each future year, you run the same netting: apply the carryover against that year’s gains, then deduct up to $3,000 of any remainder against ordinary income.

There is no expiration date. An investor sitting on a $50,000 net loss from one bad year can grind it down $3,000 at a time or knock it out faster by realizing capital gains in later years. The Instructions for Schedule D include a Capital Loss Carryover Worksheet for tracking the running balance.⁶

One thing carryovers cannot do is outlive you. Any unused carryover can be claimed on the decedent’s final income tax return, but it does not pass to the estate or to a surviving spouse’s separate return.⁷

The Wash Sale Rule Is the Big Trap

Sell a stock at a loss and buy back a “substantially identical” security within 30 days before or after the sale, and the IRS disallows the loss for that year.⁸ The window totals 61 days: the 30 days before the sale, the sale date, and the 30 days after. It also applies when your spouse or a corporation you control does the buying.

The disallowed loss is not lost forever. It gets added to the cost basis of the replacement security, so you recognize it when you eventually sell the replacement in a qualifying transaction. Tracking those adjusted bases across multiple wash sales gets complicated quickly.

What “Substantially Identical” Means

The IRS has never published a full definition. Repurchasing the same stock clearly triggers the rule. Buying a different company in the same industry clearly does not. The gray zone in between includes two mutual funds tracking the same index, options on the stock you just sold, and preferred versus common shares of the same company. If you want to stay invested while realizing the loss, the safe move is to buy something that tracks a different index or a meaningfully different basket.

Cryptocurrency Is Currently Outside the Rule

The wash sale statute applies to “stock or securities.” Because cryptocurrency and other digital assets are classified as property under federal tax law, they currently sit outside the rule’s reach.⁸ You can sell Bitcoin at a loss and buy it back immediately without triggering a disallowance. Congress has proposed extending the rule to digital assets, but no such change has been enacted as of this writing.

Worthless Securities

You don’t always need a buyer. If a stock or bond becomes completely worthless, federal law treats it as though you sold it for zero on the last day of the tax year in which it became worthless.⁹ That deemed sale date determines whether the loss is short-term or long-term.

The hard part is proving the exact year of worthlessness. The IRS can challenge your chosen year, so keep evidence such as a bankruptcy filing, a delisting, or a company statement that equity holders will receive nothing. If you miss the year, you can file Form 1040-X, and the window is unusually generous: seven years from the original due date of that year’s return, or two years from the date you paid the tax, whichever is later.¹⁰

Securities abandoned after March 12, 2008, also qualify. To abandon a security, you must permanently give up all rights in it and receive nothing in exchange.¹⁰ Many brokers have a process for formally removing a worthless position from your account, which helps document the abandonment.

A Better Deal for Some Small-Business Stock

If you invested in a qualifying small business corporation and the stock becomes worthless or you sell at a loss, you may treat up to $50,000 of the loss ($100,000 on a joint return) as an ordinary loss rather than a capital loss.¹¹ Ordinary loss treatment is more valuable because it isn’t capped at $3,000 per year and offsets income dollar for dollar.

To qualify, the corporation must have received no more than $1,000,000 in total capital contributions (including the issuance of the stock in question), and you must have received the stock directly from the company for money or property rather than buying it from another shareholder. The corporation also must have earned more than half its gross receipts from active business operations, rather than passive sources like rents, royalties, and dividends, during its five most recent tax years. Any loss above the annual limit reverts to capital loss treatment and follows the normal netting rules.

Losses in Retirement Accounts Don’t Count

Investments held inside a traditional IRA, Roth IRA, 401(k), or other qualified retirement plan sit in a separate tax system. You generally cannot claim a capital loss deduction for a decline in value inside these accounts.¹² The standard capital gain and loss rules don’t apply because these accounts already receive favorable tax treatment: tax-deferred growth in traditional plans and tax-free growth in Roth plans.¹⁰

The trade-off is that gains inside these accounts aren’t taxed annually either. You pay tax on traditional-account distributions when you take them; qualified Roth distributions come out tax-free. If the market drops your balance below what you contributed, you cannot deduct the difference the way you could with a taxable brokerage account.

How to Report the Loss

Every sale or exchange goes on Form 8949 (Sales and Other Dispositions of Capital Assets), which asks for the description, dates acquired and sold, proceeds, and cost basis.¹³ Totals from Form 8949 flow into Schedule D of Form 1040, where the netting calculation happens.³ The final net loss then lands on Line 7a of Form 1040 as a reduction to your adjusted gross income.¹⁴

Your brokerage sends Form 1099-B, or Form 1099-DA for digital asset transactions, reporting the proceeds and generally the cost basis for each sale to both you and the IRS. The IRS matches these forms against your return, so mismatches with your figures produce automated notices. If the broker’s reported basis is wrong (common with transferred shares, stock splits, or reinvested dividends), Form 8949 has a specific adjustment mechanism rather than an overwrite; the form’s instructions walk through the codes.¹⁵

1
Office of the Law Revision Counsel. 26 U.S.C. 1211 – Limitation on Capital Losses
2
Office of the Law Revision Counsel. 26 U.S.C. 1212 – Capital Loss Carrybacks and Carryovers
3
Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
4
Office of the Law Revision Counsel. 26 U.S.C. 1221 – Capital Asset Defined
5
Internal Revenue Service. Losses (Homes, Stocks, Other Property)
6
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
7
Internal Revenue Service. Publication 559, Survivors, Executors, and Administrators
8
Office of the Law Revision Counsel. 26 U.S.C. 1091 – Loss From Wash Sales of Stock or Securities
9
GovInfo. 26 U.S.C. 165 – Losses
10
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
11
Office of the Law Revision Counsel. 26 U.S.C. 1244 – Losses on Small Business Stock
12
Internal Revenue Service. What If My 401(k) Drops in Value?
13
Internal Revenue Service. Instructions for Form 8949 (2025)
14
Internal Revenue Service. 1040 (2025) General Instructions
15
Internal Revenue Service. Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets