Lost Money in Your Brokerage Account in 2022? Here's How It Could Impact Your Tax Return

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  • Capital losses can seem like a setback from an investment perspective.
  • From a tax standpoint, they can lead to major savings.
  • You only get to claim a loss if you sold investments at a loss, but not if just the value of your portfolio dropped.

A loss is hardly something to celebrate, but it might benefit you tax-wise.

It's fair to say that 2022 was a pretty rocky year for investors. The S&P 500 index, which is generally used to measure the stock market's performance on a whole, lost around 18% last year. And that means a lot of investors may be looking at lower balances in their brokerage accounts.

If you took a loss in your brokerage account last year, you may be stressed out about meeting your financial goals. But while capital losses are not a good thing in theory, they can become a positive one in practice.

How to use an investment loss to your advantage

Maybe you had to sell some assets in your brokerage account at a loss last year to drum up cash to cope with inflation and avoid credit card debt. If so, try to brush it off. Just because you took a loss one year doesn't mean you're not going to meet your long-term financial goals.

Also, a capital loss in your brokerage account might serve as a nice tax break this year. You're allowed to use capital losses on investments to offset capital gains. And if you have a capital loss that exceeds your gains, you can use the remainder to offset some ordinary income.

So, let's say you took a $5,000 loss in your brokerage account last year because you bought stocks at $8,000 and sold them when they were only worth $3,000. If you happened to also make $5,000 in gains last year, that $5,000 loss will cancel out your gains so you don't owe the IRS any tax on your profits.

But let's be real -- a lot of investors didn't have many gains to take in 2022 due to the state of the stock market. So, let's say you're sitting on a $5,000 loss and only have $2,000 in gains. In that case, you can use your remaining $3,000 loss to offset $3,000 of ordinary income.

But to be clear, $3,000 is the maximum amount of ordinary income you can offset with capital losses in a single year. So in our example, let's say you have a $5,000 loss and no capital gains whatsoever. In that case, you'd take your $3,000 ordinary income loss and then carry the remainder of your capital loss into the following tax year.

You can only claim an actual loss

While a capital loss in your brokerage account could serve as a tax write-off for you, you'll need to have actually sold off investments to get that tax benefit. If the value of your portfolio has fallen from $8,000 to $3,000, but you didn't actually sell assets at a loss, then you can't claim a tax break for what can only be deemed a hypothetical loss. 

If you're not sure about the rules of capital losses, consult a tax professional. They can help guide you through the nuances and help you benefit the most from a tax perspective.

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