Q&A: Deducting investment losses

Q: I've taken a beating in the stock market lately. How can I deduct my investment losses?

A: Capital losses on the sale of investments such as stocks, bonds, mutual funds, and other securities are deductible with some limits. First, the losses must be realized and not unrealized paper losses. In other words, an actual sale must take place. The annual limit on the deduction of capital losses is $3,000. However, you can use capital losses in excess of this limit to offset current-year capital gains from the sale of other investments, against prior-year installment sale gains, and against current-year capital gain dividends. Capital losses not otherwise absorbed or deducted in the current year can be carried forward to future tax years.