No -- if I default on the loan, the shares are pledged as collateral to the lender. The lender will own the shares outright. In the event of default, it seems like I have "sold" the share for $26.96. Assume I bought originally bought for $10 a share. Will my cost basis be $10/share or $16.96 per share? (Also, is the difference between the 1099-MISC and the cost basis is going to be considered LT capital gains, a mix of LT & ST capital gains, or ordinary income?)

Reply to Marvin,EA's Post: Need 2 points of clarification:

1. You wrote "You should only receive a 1099-MISC for the actual amount defaulted (interest, value of stock when pledged minus $10)." Shouldn't this read "You should only receive a 1099-MISC for the actual amount default (interest, plus value of the stock pledged, minus the value of the stock at time of default)." e.g., let's pretend that when the loan comes due, the stock is trading at $15, and I default -- that means I get a 1099-MISC for $26.96 - 15 = $11.96. Correct?

2. I understand this $11.96 showing up as ordinary income. I don't understand when you write "You will also report the amount from the 1099-MISC on Sch. D as long-term capital loss. How can the transaction be recorded as *both* ordinary income and a capital loss? (Seems like it should be one or the other?) If it does show up as a capital loss, how much of a capital loss is it? The full $11.96? Or just $5 ($20 (value at time of pledge) - $15 (value when loan came due)?

Thanks.

Reply to Marvin,EA's Post: I think we are almost there.

To recap:

- Bought stock for $10/share at some point long ago, say 5 years ago
- Current value = $20/share, getting a 3 year non-recourse loan for that amount. (Assume I take the proceeds of the loan and put it in an interest bearing savings account.)
- 3 years from now, I owe $26.96 in principal + interest, and the stock is worth $15 per share, and I default on the loan.

(NOTE: The lender has *never* asked me what the original cost basis was for my shares, so I don't see how they can incorporate this in any tax document they send me.)

I see how you can have both income and a capital loss -- with your example, one would be taking loan proceeds to buy and asset that then becomes worthless. I don't think it's an apples to apples comparison, however, because I'm not using the proceeds of the loan to *buy* the stock -- I'm just putting it in the bank.

As such, I think this is what happens:

(1) I will get a 1099-C from the lender
(2) On the 1099-C will be $26.96 - $15 = $11.95 (the value of the loan - the current value of the stock)
(3) I will treat that $11.95 as ordinary income
(4) I will need to treat $15 - $10 (current stock value - cost basis) as long-term capital gains

Agreed?

By the way, thanks -- I wouldn't have been able to figure this out without your input. Is there any way I can pay you more than $30?