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I read some articles on the internet but I am still confused. None of the articles seem to give me an answer that I am able to understand.

As far as I understand, I can either apply the Standard Deduction ($6500 as a single person for 2018) or the Itemized deduction (variable amount if I have uninsured medical expenses etc), whichever is greater - to my taxable income.

Now, say that I was trading in the stock market, and my (short/long term) gains + losses for the year equal negative $1000. Based on this I have 2 questions:

  1. Does my $1000 loss in stocks further reduce my taxable income in addition to the Standard or Itemized deduction.
  2. OR does it become a part of the Itemized deduction, and only matters if adding that 1000 to the total Itemized deduction amount makes it greater the Standard Deduction amount?
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Capital losses are not itemized deductions, which means that they are not part of the deductions that you need to forgo if you take the standard deduction.

Instead, you report all capital gains and losses on Schedule D, and the resulting net gain or loss gets entered in the Income section of your Form 1040 on line 13.

You are limited to deducting up to $3000 ($1500 if married filing separately) in net capital loss each year. If you have more than that, you can carry the remaining loss over into future years to offset future capital gains and income.

For your example, if you fill out Schedule D and end up with a net $1000 loss, you would enter that number as a negative number on Form 1040 line 13, and it would reduce your taxable income, offsetting $1000 worth of your regular income. In addition, you could still take the Standard Deduction, if you wish.

  • Ah, got it. So basically my capital losses or gains have no bearing on the standard or itemized deductions. If I make net capital gains, that would increase my taxable income (no limit). If I make net capital losses, my taxable income would reduce by maximum $3000 ($1500 if married filing separately). And then on that my standard or itemized deduction (whichever is greater) would be applied. Am I right? – rgamber Dec 9 '17 at 23:07
  • @rgamber You got it. And if your capital loss ends up more than $3000, you carry the remainder of the loss over into next year. – Ben Miller Dec 9 '17 at 23:19
  • You're limited to $3000 net capital loss. "Total" here is ambiguous at best. – chrylis Dec 10 '17 at 4:55
  • @chrylis You are right, "net" is a better word than "total." Fixed. Thanks! – Ben Miller Dec 10 '17 at 4:57

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