Everybody expects to make money on the stock market, else why would we invest? But, whether you invested in an 8-track supplier or Enron, or just catch the market swing on the bad side, sometimes there is a loss. Fortunately, Uncle Sam helps out on taxes.

Most property you own is a capital asset, including stocks and investment property. The instructions to the 1040 Schedule D list items that are not capital assets, such as business inventory and supplies. There are exceptions, but for the average investor, stock bought and sold during the year is likely to result in a gain or loss of capital assets.

Determination of loss or gain is made by taking the purchase price and subtracting your basis (what you have invested in the property). That is, take the purchase price, then deduct what you had invested in the property (adjusted by improvements, depreciation, stock splits, etc.). For more information on determining your basis, see IRS Publication 551, Basis of Assets.

When you have determined that you have a capital loss (or gain), next determine whether it is a short or long term loss (or gain). If you held/owned the property for one year or less, it is a short term gain/loss. Counting from the day after you acquired the property and including the day of disposal, if you held or owned the property for more than one year, it is a long term gain/loss.

Characterization of your gain/loss as short term or long term is important for two reasons:

1. Long term gains are generally taxed at a lower rate than ordinary income; and

2. It is required. (The most important reason!)

Information you have to report on Schedule D includes:

• Description, such as '100 shares ABC stock'
• Date acquired
• Date sold
• Sales price
• Cost or other basis

When you purchase stock or other capital assets, keep a record so that you will have this information when you sell it. If you have an investment plan for purchasing stocks on a regular basis, either keep good records or make sure that you can get all the required information from your broker when you need it.

With capital losses, the short and long term losses are determined separately, then lumped together to net against any capital gains you may have. If you have a net capital loss, you would claim a deduction for the lesser of $3,000 or your net loss. If your loss exceeds $3000, then the difference between short and long term losses matters.

When your losses exceed the amount you can deduct in one tax year, you have a 'capital loss carryover.' This means that you can carry your loss over to the next year, and the next, and so on until the loss has all been applied. Short term losses are applied first, so you have to keep up with which is which, if you have both long and short term losses.

The difference in short and long term treatment is important in the way taxes are calculated. You add your capital gains or deductible losses with other income to determine taxable income. On the Schedule D Tax Worksheet, long term gains are pulled out for tax calculation, then you pay the lesser of what you would normally owe or what you owe based on long term capital gains being taxed at a different rate.

This is where the difference between a long term and short term capital loss is important. Loss carryovers retain their character as short or long term, and are applied as such to next year's taxes. Since short term gains are treated as ordinary income, reducing those first with your carryover can mean a lower overall tax burden.