Lost money on an investment? This is what you need to do

September 11, 2022 4:48 am

newsfeedback@fool.com (Maurie Backman)

Posted: September 11, 2022 4:48 am

Updated: September 11, 2022 07:22

Your goal as an investor is to build a portfolio that will help you steadily build wealth over time. But on the road to wealth building, you may encounter some snags. In particular, you may end up having to sell a stock when it's low, taking a blow to that investment.

To be clear, many people's portfolios have fallen so far this year as a result of the general stock market turbulence. And that's not a good reason to sell a stock.

But let's say there's a stock in your IRA or brokerage account that's been consistently losing value since you bought it. Let's also say that you've been tracking the company's financials and have reason to believe that those stocks will be worth even less money over time. That's a good reason to take a loss instead of sitting still and trying things out.

Image source: Getty Images.

If that's the scenario you've landed in, try not to stress. While investment losses can be frustrating and upsetting, they can also work in your favor in some ways.

How to take advantage of an investment loss?

Investment losses are not ideal. But you can use them to offset capital gains in your portfolio in a non-tax-advantaged account.

Let's say you're on a stock that has done remarkably well this year, even though the market has been generally iffy. You may be tempted to sell that stock while it's high and walk away with a nice profit.

Normally, the IRS would be entitled to a portion of that gain in the form of capital gains tax. But if you're at a loss of capital, you may be able to reduce or eliminate that obligation altogether.

Let's say if you sold those winning shares today, you would win $5,000. If you have a loss of $5,000 on another stock you sell, you owe the IRS nothing.

Now let's say you are only looking at a profit of $2,000 in the above scenario. You can still use your entire $5,000 loss to your advantage. That's because the IRS allows you to offset up to $3,000 in ordinary income with capital gains losses.

Capital gains can be carried forward to future tax years. Let's say in this situation you are looking at a profit of $1,000, not $2,000. If you use your $5,000 to offset that $1,000 plus $3,000 in ordinary income, you can carry the remaining $1,000 forward.

Dig deeper - but don't beat yourself up

If you've lost money on a stock this year, it's a good idea to see if you can figure out why. Maybe you didn't spend enough time digging into that company's financial records. Or maybe that loss was unavoidable - things just went downhill at the company and it wasn't something you could have predicted.

It's a good idea to get to the bottom of why you're losing money to avoid making the same mistake again. But don't make it too difficult for yourself. It is quite rare for investors to get every decision they make right. And if you hammer on a loss, you might lose confidence in your ability to pick stocks by hand, so there's no point in struggling yourself through that.

10 Stocks We Like More Than Walmart

When our award-winning team of analysts has an investment tip, it pays to listen. The newsletter they've had for over ten years, Motley Fool Stock Advisorhas tripled the market.*

They just revealed what they believe to be the… ten best stocks for investors to buy now… and Walmart was not one of them! That's right - they think these 10 stocks are even better bargains.

View the 10 stocks

Stock Advisor returns from 2/14/21

The Motley Fool has a disclosure policy.