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Firstly, I tried to find the answer to this by reading other questions, but I am still not sure and hence this question.

I read that in the United States, I can deduct up to $3,000 in tax losses. So suppose I invest some amount higher than $3000, say $10000 in company A and $10000 in company B. Now in 5 months company A stock prices goes to a few cents, and company B stock price double. If I sell at that point, I have lost $10000 on company A trade, whereas I have gained $10000 on company B trade.

So in this case, is the $3000 limit used against the total effective gain (which is $0), or is it that whatever I gained with company B stock, $3000 is tax-free and I have to pay tax on the remaining $7000?

  • Seriously, why would someone down-vote this question? At least leave an explanation. All I'm trying to do is learn how stocks and taxes work! – rgamber Jun 30 '17 at 16:29
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Capital gains and losses offset each other first, then your net gain is taxed at the applicable rate. If you have a net loss, you can offset your other income by up to $3,000.

In your example, you have no net-gain or loss, so no tax implications from your activity.

  • Thanks, I'm trying to understand stocks and taxes and this was one of my point of confusion! Is the same applicable if in the above case if I had bought stock of company A over a year back, which would make it a 'long term loss'? – rgamber Jun 30 '17 at 1:33
  • Yes, if you have a mix of long and short gains/losses then they offset the same type first, so long term losses offset long term gains first, then excess loss can be used to offset short term gain. – Hart CO Jun 30 '17 at 2:28
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Capital losses do mirror capital gains within their holding periods. An asset or investment this is certainly held for a year into the day or less, and sold at a loss, will create a short-term capital loss. A sale of any asset held for over a year to your day, and sold at a loss, will create a loss that is long-term. When capital gains and losses are reported from the tax return, the taxpayer must first categorize all gains and losses between long and short term, and then aggregate the sum total amounts for every single regarding the four categories. Then the gains that are long-term losses are netted against each other, therefore the same is done for short-term gains and losses. Then your net gain that is long-term loss is netted against the net short-term gain or loss. This final net number is then reported on Form 1040.

Example Frank has the following gains and losses from his stock trading for the year:
Short-term gains - $6,000
Long-term gains - $4,000
Short-term losses - $2,000
Long-term losses - $5,000
Net short-term gain/loss - $4,000 ST gain ($6,000 ST gain - $2,000 ST loss)
Net long-term gain/loss - $1,000 LT loss ($4,000 LT gain - $5,000 LT loss)
Final net gain/loss - $3,000 short-term gain ($4,000 ST gain - $1,000 LT loss)

Again, Frank can only deduct $3,000 of final net short- or long-term losses against other types of income for that year and must carry forward any remaining balance.

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