Here's What Happens When You Sell a Stock at a Loss (2024)

Your goal in buying stocks is to make money. But there may come a point when you need to sell a stock at a price that's lower than what you paid for it.

Maybe you bought shares of a company promising an innovative way to diagnose medical conditions, only its technology failed a year or so after you bought those shares. That sort of news is enough to make a company's share price plummet and fail to stage a recovery.

As a general rule, you don't want to sell stocks whose share price is down as part of a broad market tumble. If the stock market undergoes a correction (a period where stock values broadly fall 10% or more), it means there's general turbulence -- not that there's something wrong with the specific investments you own.

But when you own stocks in your brokerage account that keep underperforming, and are unlikely to recover, then it's often best to dump them and take a loss rather than have them take up real estate in your portfolio. You might, for example, dump a stock whose share price started out at $50 but has continuously dropped to the point where it's now only worth $10, and you don't see that stock ever climbing again.

The good news, though, is that you can use this type of loss to your financial advantage. Here's how.

You can offset capital gains

Capital gains taxes apply when you sell assets at a price that's higher than what you paid for them. If you buy shares of a given company for $100 apiece and sell them for $250 apiece, you're looking at a $150 gain per share.

If you sell stocks at a loss in your portfolio, you can use your losses to offset capital gains. That way, you might wipe out your tax liability associated with those profits.

You can offset a limited amount of ordinary income

Let's say you're forced to sell a stock at a loss but you don't have any gains in your portfolio to offset. In that case, you can use your loss to offset up to $3,000 of ordinary income per year.

So, let's say you take a $5,000 loss on a given company and have $2,000 in capital gains that same year. In that case, you'd first wipe out those gains and then use the rest of your loss to offset your $3,000 of earnings. But in that situation, if there are no gains to offset, you'd simply offset $3,000 of income and call it a day.

Now you may be wondering what happens to that extra $2,000 loss. The answer is, it doesn't go away. Rather, you can carry it forward to future tax years and offset gains or income at that point.

A silver lining

The whole point of investing money is to grow more wealth, and selling stocks at a loss achieves the opposite goal. But sometimes, it becomes necessary to sell a stock for a price that's less than what you paid for it. And in those situations, you can at least take comfort in the fact that your loss can be used to lower your tax liability in one way or another.

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Here's What Happens When You Sell a Stock at a Loss (2024)

FAQs

Here's What Happens When You Sell a Stock at a Loss? ›

Stocks sold at a loss can be used to offset capital gains. You can also offset up to $3,000 a year of ordinary income. A silver lining of investment losses is that you can lower your tax liability as a result.

What is money lost from the selling of a stock called? ›

Capital loss - The amount by which the proceeds from a sale of a security are less than its purchase price.

What happens when a stock loses all value? ›

When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values.

Should I cut my losses and get out of the stock market? ›

The golden rule of stock investing dictates cutting your losses when they fall 10 percent from the price paid, but common wisdom just might be wrong. Instead, use some common sense to determine if it's time to hold or fold. Diversification.

Should I sell a stock at 50% loss? ›

Having a rule in place ahead of time can help prevent an emotional decision to hang on too long. It should be: Sell now, ask questions later. By limiting losses to 7% or even less, you can avoid getting caught up in big market declines. Some investors may feel they haven't lost money unless they sell their shares.

Do you pay taxes on stocks if you sell at a loss? ›

Selling a stock for profit locks in "realized gains," which will be taxed. However, you won't be taxed anything if you sell stock at a loss. In fact, it may even help your tax situation — this is a strategy known as tax-loss harvesting.

Should I sell stock at a loss for taxes? ›

It's generally better to take any capital losses in the year for which you are tax-liable for short-term gains, or in a year in which you have zero capital gains because that results in savings on your total ordinary income tax rate.

What happens if you lose 100% of your stock? ›

A drop in price to zero means the investor loses his or her entire investment: a return of -100%.

Has a stock ever come back from $0? ›

Can a stock ever rebound after it has gone to zero? Yes, but unlikely. A more typical example is the corporate shell gets zeroed and a new company is vended [sold] into the shell (the legal entity that remains after the bankruptcy) and the company begins trading again.

How do you make money on losing stock value? ›

Short selling is a strategy for making money on stocks falling in price, also called “going short” or “shorting.” This is an advanced strategy only experienced investors and traders should try. An investor borrows a stock, sells it, and then buys the stock back to return it to the lender.

What is the 7% rule in stocks? ›

However, if the stock falls 7% or more below the entry, it triggers the 7% sell rule. It is time to exit the position before it does further damage. That way, investors can still be in the game for future opportunities by preserving capital. The deeper a stock falls, the harder it is to get back to break-even.

Why do 90% of people lose money in the stock market? ›

Staggering data reveals 90% of retail investors underperform the broader market. Lack of patience and undisciplined trading behaviors cause most losses. Insufficient market knowledge and overconfidence lead to costly mistakes. Tips from famous investors on how to achieve long-term success.

What is the 7% stop loss rule? ›

Always sell a stock it if falls 7%-8% below what you paid for it. This basic principle helps you always cap your potential downside. If you're following rules for how to buy stocks and a stock you own drops 7% to 8% from what you paid for it, something is wrong.

What is the 3-5-7 rule in trading? ›

The strategy is very simple: count how many days, hours, or bars a run-up or a sell-off has transpired. Then on the third, fifth, or seventh bar, look for a bounce in the opposite direction. Too easy? Perhaps, but it's uncanny how often it happens.

At what age should you get out of the stock market? ›

There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.

What is the 3 day rule in stocks? ›

The 3-Day Rule in stock trading refers to the settlement rule that requires the finalization of a transaction within three business days after the trade date. This rule impacts how payments and orders are processed, requiring traders to have funds or credit in their accounts to cover purchases by the settlement date.

What does it mean to lose money in stock market? ›

Stock markets tend to go up. This is due to economic growth and continued profits by corporations. Sometimes, however, the economy turns or an asset bubble pops—in which case, markets crash. Investors who experience a crash can lose money if they sell their positions, instead of waiting it out for a rise.

What are losses in stocks? ›

A capital loss—when a security is sold for less than the purchase price—can be used to reduce the tax burden of future capital gains. There are three types of capital losses—realized losses, unrealized losses, and recognizable losses.

What is capital loss also known as? ›

Capital loss is the reverse of capital gain, i.e. it results in a loss when the investment is sold. In simple terms, the difference between the selling price and cost/purchase price of an investment can be described as capital gain/loss.

What is a trading loss? ›

If your business spends more than it receives during an accounting period, it has made a trading loss. You can set off trading losses against profit or capital gains in any of the ways discussed below.

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