U.S. stocks tumbled again today as traders grappled with the consequences of President Donald Trump’s tariffs. The S&P 500—a stock market index tracking the stock performance of 500 leading companies in the U.S.—which hit a record high on February 19 dropped quickly today, the second-fastest such drop in history (lagging only behind the drop due to Covid).
Investors took to social media to complain about the losses—but that can be a loaded term especially when it comes to tax. Markets go up and down—it’s the nature of the beast. When the market goes down, that doesn’t equal an actual or realized loss for tax purposes. Similarly, when the market goes back up, that doesn’t equal a real or realized gain for tax purposes. To realize a gain or a loss for tax purposes, you must do something with the asset. Typically, that means that you sell it or otherwise dispose of it.
Consider your brokerage account. If you were to sell shares of stock today, you might feel like you lost money, especially compared to the high stock prices from earlier in the year. But it doesn’t necessarily mean that you have a realized loss. For tax purposes, gains and losses aren’t determined moment to moment, or from those highs and lows, but how much your cost basis has gone up or down from when you acquired the asset to the disposition of the asset. So what’s basis?
What Is Basis?
Basis is, at its most simple, the cost that you pay for assets. The price is sometimes referred to as “cost basis” because you can make adjustments to basis over time.
When it comes to stock, your basis is generally the cost that you paid for the shares. As an example, if you bought a share of stock for $200, that’s your basis, adjusted for costs like commissions and recording or transfer fees. You’ll also adjust your basis to reflect certain activities like stock splits or non-dividend distributions (if that just made your eyes glaze over, don’t worry—those adjustments are generally figured for you if you work with a broker).
If you acquire stock another way, such as by gift, your basis is usually the same as the previous owner’s basis. That said, an exception exists for stock acquired by inheritance, as the basis is typically the date of death value.
Selling Is A Taxable Event
When you dispose of the stock, that’s a taxable event. Usually, you dispose of an asset by selling it, but disposal can also include gifting, donating, or otherwise transferring the asset out of your control.
The value of the stock or asset at that moment (the taxable event) is what matters—nothing else matters. It doesn’t matter if the stock went up and down a hundred times in the middle.
Your realized gain or loss is figured by subtracting the basis from the sale price. All of the activity in the middle is, for tax purposes, just a bunch of squiggly lines. The ups and downs may mess with your head—and your blood pressure—but they won’t hit your wallet until you’re ready to cash out.
That is the sticking point for many taxpayers: You want the ups and downs to mean something, but they don’t, at least not for tax purposes.
That’s why investors sometimes suggest that you hold onto assets during periods of volatility. If and when the value goes back up, there are no tax consequences. But when you sell or otherwise dispose of the asset, you have a taxable event.
Capital Gains And Losses
At tax time, you’ll report all of your realized gains and losses on Schedule D, Capital Gains and Losses, and then transfer the results to the reconciliation page on Form 1040. Here’s what else you need to know:
- If your realized gains are more than your realized losses, you have a taxable capital gain. The tax rate will depend on whether those gains or losses are long-term or short-term.
- If you held the shares for one year or less before you disposed of them, your capital gain would be short-term. Short-term gains are generally taxed at your ordinary income tax rate.
- If you held the shares for more than one year before you got rid of them, your capital gain would be long-term. For 2025, the long-term capital gains rates for most assets are 0%, 15%, or 20%, depending on your taxable income—your tax bracket determines the rate.
- If your realized losses exceed your realized gains, you can claim up to $3,000 (or $1,500 if you are married filing separately) to offset your other taxable income. If your losses exceed the limit, you can carry the loss forward to later years subject to some restrictions.
But if there’s no taxable event? For tax reasons, nothing happens. You don’t file Schedule D. That’s true even if the value of your shares went up and down—if there’s no sale or disposition, there’s nothing to report.
Here’s An Example
Let’s go back to our earlier example. The basis of your share of stock was your purchase price, or $200. Let’s assume that in March, the value of the share hit $300. What does that mean for tax purposes? It depends on what happens. Here are a few potential outcomes.
- You continue to hold the stock when it’s worth $300. Result? Unrealized gain ($300 value – $200 basis). No capital gain.
- On Friday, the stock took a hit and fell to $210. Result? Unrealized gain ($210 value – $200 basis). No capital gain.
- Today, the stock took another hit and fell to $75. You continue to hold the stock. Result? Unrealized loss ($75 value – $200 basis). No capital loss.
- This morning, the stock price went back up to $180. You continue to hold the stock. Result? Unrealized loss ($180 value -$200 basis). No capital loss.
- By the day’s end, the stock dropped again and hit $150, so you finally got rid of it. You have a realized loss and a capital loss of $50 ($150 selling price – $200 basis). You calculate the loss using the selling price ($150), not the high price (the $300 high value is meaningless when it comes to a capital gain or loss) and not at the low price (the $75 low value is similarly useless for purposes of capital gain or loss).
Capital gains and losses can be confusing. But don’t make them more complicated than they need to be. In a volatile market, your portfolio may go up and down, but unless you’re trading or selling off, you won’t realize those losses for tax purposes.
Retirement Accounts
The rules are different when gains or losses happen inside your retirement accounts. When it comes to an IRA (including Roth IRAs), you do not typically take IRA losses or gains into account on your tax return—even if you had a realized gain or loss. That’s because withdrawals from Roth IRAs are usually tax-free, and required minimum distributions (RMDs) from your traditional IRA are taxed as ordinary income.
There is an exception: If you made a non-deductible contribution to your traditional IRA, you would have basis for claiming a gain or loss. Most taxpayers, however, don’t make non-deductible IRA contributions.
(It’s theoretically possible to transfer stock out of your IRA as part of a conversion. The problem? Basis. For tax reasons, the fair market value of the stock on the day of the distribution is your basis. If you’re trying to take advantage of the prior tumble in value for tax purposes, you won’t be able to. And keep in mind that any ordering and distribution rules would still apply.)
The same is true for qualified plans like your 401k. Generally, you won’t claim capital gains losses on a retirement account. You would only have a capital loss when you receive a distribution from a previously taxed account, which is not very common.
(And if you’re scratching your head because you’re sure that you used to be able to deduct something, you’re not wrong. The Tax Cuts and Jobs Act (TCJA) eliminated a quirk in the tax law that allowed you to deduct losses inside your Roth IRA.)
That’s why investors generally want to avoid volatility inside retirement accounts—you won’t get the “benefit” of any losses. (I know that losses typically aren’t terrific, but for tax purposes, you can use them to offset other income).
Exceptions
Exceptions and special rules may apply to small business stocks, assets held in retirement accounts, and adjustments related to calls, puts, and straddles. There are also special rates and limits for artwork and collectibles, as well as real estate—for example, you may not claim a capital loss for a personal residence. If you have any of these assets, ask a tax professional for more guidance.
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