Offset Gains

• You can use your capital losses to offset gains you have elsewhere. When you sell an asset for more than you paid, you have a capital gain. When you sell for less than the purchase price you have a capital loss instead. So if you sell one stock with a gain and another with a loss, you can use the loss from the one to offset the gain you have on the other. This can be very useful if you need to rebalance your portfolio and want to keep your taxes to a minimum.
  
  

Reduce Taxable Income

• If you do not have any capital gains to offset, you can use your losses to offset up to $3,000 in income. If your losses total more than $3,000 you can carry over the remainder into the following year and offset additional income. The amount of capital losses and capital loss carryover is recorded on your 1040 form. If you had carryover losses from the previous year, you can find the remaining amount listed on your previous year tax return.
  
  

Schedule D

• When you have capital gains or losses, you need to report them on Schedule D. You can download a copy of Schedule D from the IRS website. Once you have the form in front of you, simply use the sections to record your capital gains and your capital losses. If you are using a tax preparation software package, that software walks you through the process with a series of questions. When you answer yes to a question about capital losses the software uses the answers you provide to complete the appropriate sections of Schedule D.
  
  

Careful Record Keeping

• When you buy and sell individual stocks or mutual funds, you need to keep accurate records of every purchase and sale. Having complete records at hand makes it much easier to compute both your capital gains and your losses. While your brokerage firm or mutual fund company might keep its own records, it is still a good idea for you to have copies of every confirmation statement. These confirmation statements become even more important if you transfer your account from one firm to another. The receiving firm has no way of knowing the cost basis of those transferred assets, so you will need to rely on your own records to compute your capital loss and report it accurately to the IRS.