Although investment (brokerage or retirement) account losses can be disheartening, they do not automatically qualify as tax-deductible losses. Determining capital gains or losses for federal tax purposes hinges on the asset’s initial purchase cost and the duration for which it was held prior to sale.”

U.S. equity markets suffered significant losses on Monday, April 7th, 2025, as investors responded to President Donald Trump’s recently implemented tariff policies. The S&P 500, which tracks the performance of 500 leading American companies, plunged dramatically from its February 19th record high. This precipitous decline represents the second-fastest market correction in history, surpassed only by the COVID-19-triggered market collapse.

The rapid deterioration in market sentiment highlights growing concerns among investors about the potential economic impact of the new trade policies. In the coming weeks, market analysts will closely monitor how these tariffs might affect corporate earnings, supply chains, and broader economic indicators.

Market Movements vs. Tax Reality: Understanding the Difference

While investors took to social media to lament market losses, these aren’t automatically tax losses. It’s important to clarify what constitutes an actual “loss” from a tax perspective. Realized gains or losses, for tax purposes, occur only when an asset is sold or disposed of.

Forbes contributor Kelly Philips Erb wrote an article about this topic, examining your brokerage account, for example. If you sold stock today, you might feel like you’ve taken a loss—especially when comparing the current price to earlier highs this year. But that doesn’t automatically mean you’ve realized a loss for tax purposes.

The market’s ups and downs do not measure yearly gains and losses. Instead, they’re determined by the difference between your cost basis—what you paid for the asset—and the price at which you sold it.

So, what exactly is basis? Let’s break it down.

What Is Basis?

Basis represents the original investment you make in an asset. While often called “cost basis,” this amount can be adjusted over time as your investment circumstances change.

Stock Basis Fundamentals

Your basis typically equals the purchase price and any associated acquisition costs for stocks. For example:

• If you purchase a share of stock for $200, this becomes your initial basis
• Additional costs like commissions and transfer fees are added to this amount
• Specific corporate actions like stock splits or non-dividend distributions will require basis adjustments (your broker typically handles these calculations)

Special Basis Circumstances

The determination of basis changes when you acquire stock through means other than a standard purchase:

• Gifted Stock: Your basis is generally the same as the previous owner’s basis
• Inherited Stock: A critical exception exists here—basis is usually “stepped up” to the fair market value on the date of death

Understanding your correct basis is essential for accurate tax reporting when you sell or dispose of the investment.

Selling Is A Taxable Event

When you dispose of stock or other investments, you trigger a taxable event. While selling is the most common form of disposition, other actions like gifting, donating, or transferring ownership also qualify as dispositions that may have tax implications.

Only Two Points Matter

From a tax perspective, only two moments in your investment timeline have significance:

1. The establishment of your basis (typically when you acquire the asset)
2. The value at disposition (when you sell or transfer the asset)

Regardless of how dramatic, The market fluctuations between these two points have no tax relevance. Your realized gain or loss is calculated simply by subtracting your basis from the proceeds received upon disposition.

Understanding Capital Gains and Losses

For tax purposes, capital gains and losses are reported on Schedule D and then transferred to Form 1040.

• When realized gains exceed losses, the difference is a taxable capital gain. The tax rate depends on whether the gains are short-term (held for one year or less, taxed at ordinary income rates) or long-term (held for more than one year, taxed at 0%, 15%, or 20% in 2025, depending on income).
• If realized losses exceed gains, you can deduct up to $3,000 ($1,500 if married filing separately) from other taxable income, with excess losses carried forward to future tax years.

If there is no sale or disposal of an asset, there is no taxable event, and therefore nothing to report on Schedule D, even if the asset’s value has fluctuated.”

Market Fluctuations vs. Tax Events

Market volatility is inherent to investing—prices naturally rise and fall over time. However, these paper gains and losses have distinct tax implications:

• Paper Losses: When market values decrease, investors may see their portfolio values decline, but these are not considered losses for tax purposes until assets are sold.
• Paper Gains: Similarly, when markets rebound and portfolio values increase, these gains remain unrealized for tax purposes until a transaction occurs.

Realized Gains and Losses

For tax reporting purposes, a gain or loss is only “realized” when you take action with your assets. This typically involves:

• Selling securities
• Exchanging one asset for another
• Otherwise disposing of an investment

Until such an action occurs, market fluctuations—regardless of magnitude—remain unrealized and have no immediate tax consequences.

Retirement Accounts: Tax Treatment of Gains and Losses

For IRAs, including Roth IRAs, gains and losses are typically not reported on tax returns, even when realized. Roth IRA withdrawals are usually tax-free, and required minimum distributions (RMDs) from traditional IRAs are taxed as ordinary income.

• Exception: Non-deductible traditional IRA contributions create a basis for gain/loss claims, though this is uncommon.
• IRA conversions: Stock transfers use fair market value at distribution as basis, negating prior value drops for tax purposes.

401(k) and Qualified Plans: Capital gains/losses are generally not claimed. Losses are only applicable for distributions from previously taxed accounts, which is rare. Note: The TCJA eliminated deductions for losses within Roth IRAs.

Key takeaway: Volatility within retirement accounts doesn’t offer tax loss benefits.”

Exceptions

Specific exceptions and complex rules govern the tax treatment of small business stocks, retirement account assets, options trading, artwork, collectibles, and real estate. Due to the intricacies, consulting a qualified tax professional for personalized advice is strongly recommended.

Market Volatility and Tax Strategy

This tax reality explains why financial advisors often recommend holding investments during volatile markets. The temporary paper gains and losses you experience have no tax consequences until you decide to sell.

While market swings may affect your investment psychology and cause stress, they remain merely “squiggly lines” on a chart from a tax standpoint until you take action. Only when you sell does the current value become relevant for tax purposes.

This disconnect between market movements and tax consequences can frustrate investors who want each rise and fall to have meaning, but understanding this principle is essential for making tax-efficient investment decisions.