For example, I made $1000 dollars in stock market on the first half year. I sold $500 worth of stock. So I have $500 still in the market and $500 in cash. Then I bought $4000 new stocks in the 2nd half year. In December, the $4000 stocks dropped to only $2000 in value. So in total, I lost $1000 this year.

In order to claim the $1000 net lost in tax credit, do I need to sell all the stocks before the new year? If I don’t sell off the stocks, will I have to pay the tax for the $500 that I made in the first half year by selling the stocks?

  • 2
    Yes on both counts. Only realized losses are tax relevant.
    – Aganju
    Dec 20 '21 at 18:31
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    You haven't lost any money until you actually sell the stock for less than you paid for it.
    – chepner
    Dec 20 '21 at 18:41
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    Your math doesn't add up. You say you "made $1000" but had $500 in stock and $500 in cash after selling. How much did you pay for the stock that made $1000? Then you say you lost $2000 in the second half so lost $1000 in total. $500 - $2000 = -$1500, not -$1000.
    – D Stanley
    Dec 20 '21 at 19:14
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    I'm just trying to make sure you know that you're taxed on gains and losses, not on the total amount that you sold for. So you may not have to pay tax on all $500.
    – D Stanley
    Dec 20 '21 at 19:15
  • 1
    You haven't lost any money until you actually sell the stock for less than you paid for it. That is incorrect. At this point in time he has lost the money but he hasn't realized the loss. Dec 20 '21 at 19:43

Short answer: Yes.

You have to sell the stock in order to take the loss on your taxes. So, if your $4000 worth of stock is now priced at $2000 and you sold it, you would have a loss of -$2000. This is, technically, a "short term" loss, since the stock was held less than a year. You would then net it out against and other short term gains and losses for the year. Your first trade is a little unclear, so I'm going to assume you bought the stock for $X, the stock then went up $1000, and you sold half, realizing $500 in gain. So, you net the two for a combined -$1500 short term loss.

After all short term sales are accounted for, you then net it against any long term gains (gains on any stock held longer than a year, which you sold this year) or losses.

After that, any negative amount can be taken as a tax deduction, up to a limit of -$3000 in any given year. Any additional losses over that amount are rolled over to the next year's taxes.

Note: you said "tax credit". It's not a credit, it's a deduction on your taxes. It reduces the amount of your taxable income.

Note #2: if you buy back the stock within 30 days, the wash sale rule applies, and you can't take the loss.

Note #3: if all you want to do is not pay taxes on that earlier $500 gain, you can simply sell $500 of the losing stock. Since you bought that for $1000, you'd have a -$500 loss for a net short term gain/loss for the year of $0.

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