Calculating Basis

• The first step, and sometimes the most difficult one, is to calculate your cost basis. This can be challenging if you bought shares at various prices at different times. You can calculate your basis by adding up the total cost of buying all the shares and dividing by the number of shares. Or you can use the first-in, first-out method and compare your actual sale prices to your purchase prices in the order the shares were acquired.
  
  

Schedule D

• Long- and short-term capital gains and losses are reported on Schedule D to form 1040. A long-term capital loss occurs when you owned the stock for more than a year at the time it was sold. It may be possible that a single transaction includes both long- and short-term capital losses, depending on how you acquired the stock and when you sell it. Schedule D is also where you report any losses you're carrying over from previous years.
  
  

Wash Sale Rule

• The exception to deductions for capital losses is the wash sale rule. This means that if you sell stocks for a loss but then purchase the identical stock again within 30 days, you cannot deduct the loss realized through the sale. The wash rule also holds, however, that if you purchased shares of the same stock within the 30 days prior to the sale, you also cannot deduct for the loss realized through the sale. Essentially, the wash sale rule prevents you from deducting losses without really changing your position in the stock.
  
  

Reporting

• Part III of Schedule D combines the short- and long-term gains and losses reported in the previous section. If the net is a loss, up to $3,000 can be reported on line 13 of your Form 1040, reducing your taxable income. Even if your net was a gain, the losses included on Schedule D are used to offset some of your capital gains before the capital gains tax rate is applied. Be sure to attach Schedule D to your 1040 when you file your return.