Your goal in buying stocks is to make money. But there may come a point when you need to sell a stock at a price that's lower than what you paid for it.
Maybe you bought shares of a company promising an innovative way to diagnose medical conditions, only its technology failed a year or so after you bought those shares. That sort of news is enough to make a company's share price plummet and fail to stage a recovery.
As a general rule, you don't want to sell stocks whose share price is down as part of a broad market tumble. If the stock market undergoes a correction (a period where stock values broadly fall 10% or more), it means there's general turbulence -- not that there's something wrong with the specific investments you own.
But when you own stocks in your brokerage account that keep underperforming, and are unlikely to recover, then it's often best to dump them and take a loss rather than have them take up real estate in your portfolio. You might, for example, dump a stock whose share price started out at $50 but has continuously dropped to the point where it's now only worth $10, and you don't see that stock ever climbing again.
The good news, though, is that you can use this type of loss to your financial advantage. Here's how.
You can offset capital gains
Capital gains taxes apply when you sell assets at a price that's higher than what you paid for them. If you buy shares of a given company for $100 apiece and sell them for $250 apiece, you're looking at a $150 gain per share.
If you sell stocks at a loss in your portfolio, you can use your losses to offset capital gains. That way, you might wipe out your tax liability associated with those profits.
You can offset a limited amount of ordinary income
Let's say you're forced to sell a stock at a loss but you don't have any gains in your portfolio to offset. In that case, you can use your loss to offset up to $3,000 of ordinary income per year.
So, let's say you take a $5,000 loss on a given company and have $2,000 in capital gains that same year. In that case, you'd first wipe out those gains and then use the rest of your loss to offset your $3,000 of earnings. But in that situation, if there are no gains to offset, you'd simply offset $3,000 of income and call it a day.
Now you may be wondering what happens to that extra $2,000 loss. The answer is, it doesn't go away. Rather, you can carry it forward to future tax years and offset gains or income at that point.
A silver lining
The whole point of investing money is to grow more wealth, and selling stocks at a loss achieves the opposite goal. But sometimes, it becomes necessary to sell a stock for a price that's less than what you paid for it. And in those situations, you can at least take comfort in the fact that your loss can be used to lower your tax liability in one way or another.
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FAQs
The advantage of selling stocks at a loss is that you can deduct these capital losses on your taxes. You're allowed to do this when your capital losses (the amount you lost that year on investments you sold) exceeds your capital gains (the amount you made that year on investments you sold).
What happens when I sell stock at a loss? ›
Key Takeaways
You can use capital losses to offset capital gains during a tax year, allowing you to remove some income from your tax return. You can use a capital loss to offset ordinary income up to $3,000 per year If you don't have capital gains to offset the loss.
What happens to your money when you lose it in the stock market? ›
The most straightforward answer to this question is that it actually disappeared into thin air, due to the decrease in demand for the stock, or, more specifically, the decrease in enough investors' favorable perceptions of it to move the price down by selling.
What happens when a stock loses value? ›
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values. The New York Stock exchange (NYSE), for instance, will remove stocks if the share price remains below one dollar for 30 consecutive days.
What happens if you sell a stock for less than you paid? ›
Your income or loss is the difference between the amount you paid for the stock (the purchase price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss, but you may also have ordinary income to report. You must account for and report this sale on your tax return.
Do I get a tax break if I sell stock at a loss? ›
No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).
Is it worth selling at a loss? ›
Stocks sold at a loss can be used to offset capital gains. You can also offset up to $3,000 a year of ordinary income. A silver lining of investment losses is that you can lower your tax liability as a result.
Do I lose all my money if the stock market crashes? ›
While it appears that you're losing money during a market crash, in reality, it's just your stocks losing value. For example, say you buy 10 shares of a stock priced at $100 per share, so your total account balance is $1,000. If that stock price drops to $80 per share, those shares are now only worth $800.
How to recover from a big loss in the stock market? ›
Here's how you can bounce back.
- The markets can sometimes shift rapidly. ...
- Learn from your mistakes.
- Traders need to be able to recognize their strengths and weaknesses—and plan around them. ...
- Keep a trade log.
- On a related note, you can track your trading activity to pinpoint what has worked well and what hasn't in the past.
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
Can a stock ever rebound after it has gone to zero? Yes, but unlikely. A more typical example is the corporate shell gets zeroed and a new company is vended [sold] into the shell (the legal entity that remains after the bankruptcy) and the company begins trading again.
Do you get money back on stock losses? ›
Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.
Could the stock market go to zero? ›
Real-World Example of a Stock Losing All Its Value
Sometimes a company will be forced into bankruptcy and its stock fall to zero as the result of an accounting scandal or fraud. Take the famous case of Enron, a large and influential energy and trading company in the 1990s.
Is it bad to sell stocks at a loss? ›
An investor may also continue to hold if the stock pays a healthy dividend. Generally, though, if the stock breaks a technical marker or the company is not performing well, it is better to sell at a small loss than to let the position tie up your money and potentially fall even further.
What happens if I sell my shares at a loss? ›
It involves selling shares where you are sitting on a loss, which may then reduce your total capital gains (i.e. profit) realised throughout the financial year. The intent is to minimise tax that you might owe from investing in shares. Some investors have difficulty converting a loss on paper into an actual loss.
How much will I be taxed if I sell my stock? ›
If you sell stocks for a profit, your earnings are known as capital gains and are subject to capital gains tax. Generally, any profit you make on the sale of an asset is taxable at either 0%, 15% or 20% if you held the shares for more than a year, or at your ordinary tax rate if you held the shares for a year or less.
Can you write off 100% of stock losses? ›
If your net losses in your taxable investment accounts exceed your net gains for the year, you will have no reportable income from your security sales. You may then write off up to $3,000 worth of net losses against other forms of income such as wages or taxable dividends and interest for the year.
Do you owe money if a stock goes negative? ›
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
Do I have to report stocks sold at a loss? ›
If you experienced capital gains or losses, you must report them using Form 8949 when you file taxes. Selling an asset, even at a loss, has crucial tax implications, so the IRS requires you to report it. You'll receive information about your investments from your broker or bank on Forms 1099-B or 1099-S.
How long to wait after selling stock for loss? ›
What the wash sale rule is. The wash sale rule states that if you buy or acquire a substantially identical stock within 30 days before or after you sold the declining stock at a loss, you generally cannot deduct the loss.
