It's important to first define what a loss is for tax purposes. Just because the market goes up or down doesn’t mean anything unless there's a taxable event. A taxable event is a sale of stock, death of an owner or other event that is said to trigger a tax consequence.

If you didn't have a taxable event, there's no tax consequence to you, even if the value of your portfolio decreased (or, if you're lucky, increased!).

If you did have a taxable event, you must report your gain or loss to the IRS. You determine your gain or loss by figuring the difference between the selling price of the stock and your basis (usually the amount that you paid for the stock, adjusted for reinvestments and splits).

You report your gains as either long term or short term - the rates of tax will vary according to how long you held the asset and your own tax rate. You report your losses in the same manner.

If your gains exceed your losses, you have a taxable capital gain. If, however, your losses exceed your gains, you have a capital loss. You can claim up to $3,000 (or $1,500 if you are married filing separately) of losses in any tax year. The loss offsets your taxable income for the current tax year. If your losses exceed the cap, you can carry the loss forward to later years.

To report gains or losses, use a Schedule D as part of your federal form 1040.

A quick word of caution: the rules are a little different when your stocks are held inside of a retirement account. Gains or losses inside of a tax-deferred account are only realized when you take a distribution from your plan.

The IRS explains how to handle capital gains and losses here: http://www.irs.gov/newsroom/article/0,,id=106799,00.html

Check out points 8 through 10:

#8
If your capital losses exceed your capital gains, the excess can be deducted on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).
#9
If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
#10
Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.