How to Use Capital-Loss Deductions

Q: You recently advised those making charitable donations to consider selling stocks that have lost value since their purchase, and giving the cash to the charity instead of the stock. Can you tell me how much capital loss one can take against income for 2014?

— J.M., Lititz, Pa. A: Our reader correctly summarizes a recent column. Suppose you itemize and are thinking of donating to charity to get a tax deduction for this year. Consider donating assets, such as stocks, that you have owned for more than a year and that have risen sharply in value since you purchased them.

But, as our reader points out, I also said that you shouldn’t donate stocks that have gone down in value. Instead, sell those, nail down a capital loss, and donate the proceeds to your favorite charities.

Now, our reader asks how the capital-loss rules work. His question is timely since the answers may help many investors considering a long-cherished year-end tax-planning technique known as “tax loss harvesting.”

This technique involves selling stocks and other investments sitting in a taxable account and worth less than you paid for them. You can use those losses to trim your taxes.

Some rules: First, capital losses can be used dollar-for-dollar to erase capital gains. There is no limit on the dollar amount.

Second, consider what happens if your capital losses are bigger than your capital gains, leaving you with a net loss. In that case, you typically can deduct as much as $3,000 a year from your ordinary income, such as wages. However, the limit is only $1,500 if you’re married and file your taxes separately from your spouse.

You may carry forward your excess losses into the future. For more details, see Internal Revenue Service Publication 550. Send your questions to us at askdowjones.sunday03@wsj.com and include your name, address and telephone number. Questions may be edited; we regret that we cannot answer every letter.