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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 473
Experience:  Former IRS Revenue Agent
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I sold securities in 2016 for a net profit. In 2015 I

Customer Question

I sold securities in 2016 for a net profit. In 2015 I invested money with a friend who, by contractual agreement, was supposed to put my money into an ongoing enterprise that his personally owned business was involved with. Instead he used my money for himself, possibly to pay off prior investors of his. In total I made five investments with him, all in 2015. After pursuing my lawsuit against him for two years I now want to consider some of my investments as a securities fraud loss, and deduct it against my gains of 2016. Is this possible and can I also claim a deduction for some of my legal fees related to this?
JA: The Accountant will know how to help. Is there anything else the Accountant should be aware of?
Customer: no
Submitted: 8 days ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 6 days ago.

Dear Customer,

Your question has several issues: 1) whether it is investment, capital loss, or 2) whether it is theft, and 3) when is the timing to report the loss.

These aspects are very important to be evaluated especially if the loss amount is large.

Usually, to recognize the loss, unless it is business loss, especially when it is casualty loss, the year you realize the loss is final, is the year to recognize the loss.

Because you are still in litigation, it does not seem that you can recognize the loss in 2016.

This situation is more likely a theft loss. It should be reported on Schedule A, line 20. The loss is recognized as regular income (loss) and not capital loss which is subject to (3,000) per year. Theft loss is handled as Net Operating Loss which can be carried backwards and carried forward. It is much beneficial tax treatment.

Even if you would like to use the amount or part of it for 2016 profit, the suggestion here is not to do it. It does not seem qualify for two reasons. One is that the loss is not final; the other is that it is not a capital loss. Of course, if you would like to treat it as capital loss, it is fine. But it does not seems to be in 2016.

The website links below are for your further references.

https://www.irs.gov/publications/p544/ch04.html

https://www.irs.gov/taxtopics/tc515.html

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP, IMTA

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