She Will Sell a Stock at a $40,000 Loss. That Won’t Cancel the Income From Her $40,000 IRA Withdrawal
Selling a losing stock for $40,000 looks like it should wipe out a $40,000 IRA withdrawal on your tax return, but the IRS treats these two numbers in ways that catch most retirees completely off guard.
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A retiree has a regular brokerage account, and one stock in it has gone badly. She is down $40,000 on it. She also needs cash this year, so she plans to take $40,000 out of her traditional IRA. The two numbers look like they should cancel out on her tax return. For the most part, they won’t.
Shareholders of ESS Tech (NYSE:GWH) may face this situation. On September 24, the NYSE began delisting proceedings because the company failed to meet listing standards. A delisting itself creates no tax loss. To deduct a loss, she must sell the shares or they must become worthless under tax rules.
A $40,000 Loss Buys Only $3,000 of Relief This Year
Say she sells in her taxable account and has no capital gains anywhere else this year. That leaves her with a $40,000 net capital loss. The IRS lets only $3,000 of a net capital loss reduce ordinary income in one year. For married couples filing separately, the limit is $1,500.
The loss she can’t use this year doesn’t go away. The remaining $37,000 carries forward to future years, with no expiration date.
The IRA withdrawal counts as ordinary income. Assume she has no nondeductible basis in the IRA. Then the full $40,000 withdrawal is taxable. With only $3,000 of the loss deductible, her income rises by about $37,000.
Her Withdrawal Makes $22,350 of Social Security Taxable
That extra income changes how Social Security is taxed. Say she is single and takes in $36,000 a year. The IRS adds half of her benefits to her other income to figure combined income.
Here is the rough math. Half her benefit is $18,000. Add the IRA withdrawal and subtract the $3,000 deduction, and her combined income comes to $55,000. For single filers, benefits start becoming taxable above $25,000. Above $34,000, up to 85% of benefits can be taxed. Using the IRS formula, $22,350 of her benefits become taxable income.
Without the withdrawal, her combined income would be just $15,000. That is under the threshold, so none of her benefits would be taxed. The withdrawal adds the $40,000 itself to her taxable income, and it also makes $22,350 of her benefits taxable. The 85% figure refers to the share of benefits counted as income, not the tax rate applied to them.
The $3,000 deduction helps twice. It lowers her ordinary income, and it also cuts her taxable Social Security by $2,550.
Social Security benefits rise with annual cost-of-living adjustments, but the $25,000 and $34,000 thresholds have never been adjusted for inflation, so more benefits can become taxable over time. It is one of several IRS rules that silently drain retirement accounts, all charted in our free tax trap map.
Where the $37,000 Carryforward Pays Off
Capital losses cancel capital gains dollar for dollar with no $3,000 cap. If she later sells an appreciated fund to rebalance, the carryforward absorbs those gains in full. Selling the losing stock keeps real tax value.
Selling the stock before or after the IRA withdrawal makes no difference. In the same tax year, the same $3,000 limit applies either way.
Account type matters. A loss inside an IRA gives no deduction. A Roth withdrawal or traditional IRA with nondeductible basis could change how much of her withdrawal is taxable.
For bracket planning, her income after the IRA withdrawal, taxable Social Security and the loss deduction adds up to $59,350. After the $16,100 standard deduction, her taxable income is $43,250. That falls inside the 12% bracket, which ends at $50,400 for single filers.
Numbers to Check Before She Sells
- Her actual cost basis, including reinvested dividends.
- Gains already taken this year, which cancel losses first.
- How much of the withdrawal is taxable, depending on nondeductible IRA basis.
- Her filing status, plus her full income picture, including pensions, interest, and part-time work.
Taking a smaller IRA withdrawal or spreading it over two years may protect more Social Security than the loss can this year. The carryforward remains useful later.
She can lose $40,000 in the market and still owe tax on nearly $40,000 of IRA income, plus part of her benefits. The loss is real. The tax code just makes her use most of it in later years.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
