Shares of stock are a capital asset. The Internal Revenue Service puts gains and losses from the sale of capital assets in a category separate from other types of income. When you have to sell stock for less money than you invested, you can write off the loss on your tax return. However, you have to follow IRS rules for offsetting capital gains with capital losses using Schedule D, Capital Gains and Losses.
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Offsetting Capital Gains with Losses
The IRS provides a step-by-step procedure for deducting stock losses and other capital losses on your taxes. Divide gains and losses into short term and long term. A gain or loss is long term if you own the asset for more than a year. Otherwise it's short term. Subtract long-term losses from long-term gains to find the net long-term gain or loss. Do the same for short-term gains and losses. Use any net loss in one category as a deduction against gains in the other category. If there's still a net loss remaining, you may use up to $3,000 as a deduction against other income and carry amounts over $3,000 forward to use as a tax deduction in a future year.