Question

Invested in equity in a Startup C Corp. Lost all and sued with no success.Can I offset loss against my stock portfolio capital gains? Would section 1244 apply?

Forum|Forum|4 years ago
December 24, 2021
3 replies
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TurboTax Online

You can take a deduction for a nonbusiness debt only if the entire debt is uncollectable. You do not have to wait until the entire debt is overdue to determine whether it is worthless. Nor do you have to file a lawsuit to collect the debt, obtain a judgment against the debtor, and then try, unsuccessfully, to collect on it — a process that can take years.

All that is required is for you to show that there is no longer any chance that the loan will be repaid. Obviously, you must show that you took reasonable steps to collect the debt. But even such collection efforts would not be required if the debtor files for bankruptcy, since such a filing stops all debt collection efforts by the debtor’s creditors.

Nonbusiness bad debts are treated as short-term capital losses. Such losses are first deducted from your short-term capital gains, if any. If your net short-term loss exceed your short-term gains, your net short-term capital losses are then deducted from your total long-term capital gains for the year. If your net short-term loss exceeds the long-term gain, the excess short-term loss is deductible against up to $3,000 of your other income. Any amount remaining can be carried forward and deducted in future years.

Report this in TurboTax by using these steps:
- In the search box, upper right type nonbusiness bad debt
- Jump to nonbusiness bad debt
- Continue to the screen Choose the type of investment you sold
- Select Uncollectible Debt (Nonbusiness Bad Debt)
- Continue to enter your information.

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Anonymous_

Employee

Re Section 1244, the requirements can be found at the links below.

https://www.law.cornell.edu/uscode/text/26/1244

https://www.thetaxadviser.com/issues/2009/mar/claimingordinarylossesforsec1244stock.html

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familymateu-hotmAuthor

Thanks, but the investment was in equity not debt.

Rick19744

Employee

I believe everyone understands this. However, your limited facts don't allow anyone at this point to provide an accurate response.

So @Critter-3 provides details as to the reporting if it was debt and not equity.

And @Anonymous_ provides commentary on determining if your stock will qualify as Section 1244.

So between the two, you should be able to determine how to report.

Make sure you read the commentary, as there are reporting requirements that need to accompany the tax return other than just inputting the amount of the loss.

If your investment does qualify, it may only qualify in part, but once again, we don't have any details.

Finally, should the investment loss qualify as Section 1244, this will be reported on form 4797 and not Schedule D.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

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familymateu-hotmAuthor

Thanks for such a prompt reply. The investment was made in August 2015 and the company at the time was under $1 million in issued stock. I invested $100k . The company had the license to distribute the products in the USA of a well known European beauty company. We sued for fraud in 2018 but lost the case in 2021 due to a technicality. Any more details you may need please let me know.