Once you understand how tax laws apply to your capital losses, you will quickly see the benefits of reporting them. You will be able to form strategies that actually take advantage of stock losses ahead of time. Once an investment starts to head south, you’ll be able to make the right decisions to mitigate that loss.

Stock Loss Deductions

There are two types of reportable stock loss deductions:

• Short term losses
  • stocks held for less than one year
• Long term losses
  • Stocks held for one year or longer

While short and long term losses mirror capital gains in how they are categorized, the two function very differently. With capital gains, taxes are assessed based on how long you held on to a particular stock before selling. Short term gains are taxed at regular levels while long term gains are taxed at a much lower rate.

Advantages of Stock Loss Deductions

There are many ways you can benefit from reporting stock loss deductions on your tax return. You can use loss deductions to off-set taxes owed on gains. You can even carry over loss deductions into future years. If you have no capital gains taxes to report, losses can be used to deduct from your regular income. While you’re not going to recoup the total amount of a loss, consider deductions as a sort of consolation prize. Eating a stock loss is never fun, but at least deductions make it a little bit easier of a pill to swallow.

Reporting Deductions

As with all deductions, there are limits to reporting stock loss. The IRS requires investors to follow specific rules when it comes to reporting your losses. These apply differently depending on what type of loss you are reporting… Remember when we said there were two types of capital losses? Well there are actually two more. While short and long term losses define the loss itself in terms of how long it was held, losses are actually divided into two additional categories:

• Realized losses
  • When an investment is sold at a price lower than the initial purchase
• Unrealized losses
  • When an investment is held even after its value has fallen under that of initial purchase

Both types of losses must be reported on your tax return, but only realized losses can be applied as a deductions.

Deduction Limits

There are limits to what, how often, and when you can apply loss deductions towards. Most investors use stock loss deductions to offset taxes on short term gains. Since you are taxed on short term gains at a higher rate than long term gains, it makes sense to apply everything available to minimizing tax owed on those gains. Stock loss deductions can also be used to offset your regular income taxes. While The IRS limits this to $3000 in income tax deductions for a given tax year, if you have reported losses for that year greater than that amount, they can be used to offset income tax each year until the amount expires.

Questions About Stock Loss Deductions?

This just provides a basic overview of stock losses, their tax advantages and limits. There are more limits that apply depending on the type of investment, the manner in which it is sold, and to whom the investment is sold. If you have more questions about reporting stock losses as potential deductions, it’s best to speak with a financial adviser, accountant or tax attorney. A tax attorney specializing in stock investment-loss recovery can be a great resource available to you.

Review Your Insurance Settlement

Make sure you carefully review any insurance settlement you receive for damages. Before you accept it, make sure it makes sense. You should not be intimidated by your insurance provider, they are there for YOU. If something does not look right to you or you have a question, discuss it with your insurance company. Sometimes, it can be helpful to get a second opinion or another set of eyes to review your insurance settlement. An attorney specializing in insurance disputes or contract review can be a great resource to you when reviewing your claim. They can help you catch any issues and even provide some reinforcement if you end up disputing the claim amount. Hurricane Irma is projected to majorly impact Florida. It will likely result in extensive home and property damage as it passes through the state. If you file a claim and have questions about your settlement that the insurance companies won’t answer, contact an attorney for a review.

Diversified portfolio or salad bar portfolio?

While novice investors are typically more prone to this mistake, even long-term investors can have this problem. Typically, this comes about due to lack of planning. You can’t just start building a diversified portfolio by grabbing anything that comes along. If you just start picking from all over the place, just piling on investments, that is the quickest route to making your portfolio a mess. In a recent article, Forbes refers to this as a “salad bar” portfolio.

What’s a salad bar portfolio?

You’ve probably seen (or maybe you’ve been) one of those the people going down the line at a salad bar, just piling on anything that looks good at the moment. By the time you leave the bar, your plate is loaded down with all sorts of bits and pieces. When its finally all heaped on the plate, then you realize you have way to much of everything and not enough of the stuff that matters. This is where the salad bar portfolio gets its name.

How to build a true diversified portfolio

In the article, Forbes offers up three tips for those seeking to build a true diversified portfolio:

• Make value-oriented, efficient investments
• Don’t invest based on short term gains
• Look at the big picture of a company before investing in it

We offer up an additional bit of advice if you’re investing with the help of a financial advisor. While a financial advisor can provide key insight and guidance in your investing, it’s important to remember that your are in charge of your investments. Some financial advisors or even broker-dealers are incentivized to encourage investments that will get them greater returns, not you. We encourage investors wanting to build a strong, diversified portfolio to set a a practical investment strategy and follow it.

Investor Resources

Read the full Forbes article to learn more about the risks of your diversified portfolio becoming a salad bar portfolio. If you believe you were misled in an investment by a financial advisor or broker-dealer, you may be entitled to investment-loss recovery.