This article offers a brief overview of the deductions that investors can claim when filing US tax returns.
The most significant one is losses. An investor may deduct up to US$3,000 in net capital losses each year using the Form 1040 Schedule D. Additional losses in a calendar year can be carried forward to the following year. Note the key word in the first sentence: net capital losses. For example, if you realized $5,000 in capital gains and $9,000 in capital losses during a tax year, you would have a net capital loss for that year of $4,000. You could deduct $3,000 for that year, and carry forward $1,000 of net loss to the following year’s tax return. Another example: if you realized a loss of 4,000 in one stock and a net gain of 4,000 in a second stock, you could not deduct anything because the net loss was zero.
What about margin interest? If you borrow money to purchase securities (not tax-exempt instruments), and if you itemize deductions on Schedule A, you can itemize as investment interest on Schedule A (Interest, not Misc. deductions) the investment interest you actually paid, but only to the extent you had that much investment income. Investment interest that you cannot claim because you didn’t have enough investment income can be carried forward to the next year.
Investment income includes investment interest, dividends, and short-term capital gains. You can elect to include mid- and long-term capital gains, but if you do, you cannot choose to elect tax-favored treatment of those gains.
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Contributed-By: Art Kamlet, David Ray