Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 Tax help for people who aren't so lucky with their investments

- by Alan Duvall 

Published in Dayton Daily News  March 4, 2007 

“If at first you don’t succeed, find out if the loser gets anything.” William Phelps 

In the tax world of investors, winners are blessed and losers are punished.  Fairness is not relevant. 

Individual winners of investments held for longer than one year generally pay capital gains taxes at favorable rates.  Investment losers can only use capital losses to reduce capital gains and deduct an additional $3,000 loss per year.  Unused losses are carried forward for expensing in future years subject to the same limitations. 

For example, assume an individual paid $100,000 for stock currently worth only $1,000.  Also assume the individual will never sell other securities at a gain. 

If the taxpayer sells the stock generating a $99,000 capital loss, only $3,000 per year for the next 33 years can be deducted.  If the taxpayer dies before the unused losses are fully deducted, the losses expire as well. 

What are the options?  If the stock is entirely worthless, the owner can claim a worthless stock capital deduction to gain a timing advantage, subject however to the same capital loss limitations. 

Alternatively, taxpayers may choose to simply abandon the stock in an attempt to avoid capital loss status.  To succeed in this risky gambit, the taxpayer must expressly demonstrate intent to relinquish all interest in the asset without receipt of consideration.  In the above example, the taxpayer could return the stock to the company with a written note documenting the abandonment.  The forfeiture of $1,000 compensation could well be worth the ability to currently deduct the entire ordinary loss. 

Some investors are claiming itemized theft losses of devalued stock attributable to corporate officer malfeasance.  The IRS will probably disallow such treatment, particularly if shares were purchased on the open market. 

For theft loss gambit to work, taxpayers must have acquired the investment in direct reliance upon intentionally deceptive advice from a company officer with whom they had a personal relationship.  If successful, the theft losses can be deducted without detriment of capital loss limitations. 

“To everything there is a season...A time to gain, a time to lose.”  The Byrds

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.