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I took money out of my 401K account and invested it all in…

Customer Question
I took money out...

I took money out of my 401K account and invested it all in two different overseas binary options companies who were supposed to make trades and increase my investment. However, after only a couple of months, they shut down their website and disconnected their phones leaving me out in the cold and with a total of $9,000 in losses. How do I report this loss on my taxes. I reported the 401K withdrawl as ordinary income, just not sure how to report losing it all.

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

No, but how much is the accountant going to charge me?

Submitted: 3 months ago.Category: Tax
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Answered in 26 minutes by:
3/27/2018
Tax Professional: Lev, Tax Advisor replied 3 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,142
Experience: Taxes, Immigration, Labor Relations
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If you own securities, including stocks, and they become totally worthless, you have a capital loss.

Worthless securities also include securities that you abandon.

To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it.

Treat worthless securities as though they were capital assets sold or exchanged on the last day of the tax year.

You must determine the holding period to determine if the capital loss is short term (one year or less) or long term (more than one year).

Report worthless securities on Form 8949, Part I or Part II, whichever applies.

Indicate as a worthless security deduction by writing Worthless in the applicable column of Form 8949.

Let me know if you need any help with reporting.

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Customer reply replied 3 months ago
These were not securities I purchased they were short 30 second binary options contracts that expired in 30 seconds for either a gain or loss. So technically there was not a normal asset purchased but rather an option betting if the currency pair would go up or down. So in a technical sense this was a fraudulent transaction because the company was just a shell company that wasn't really purchasing anything but just had a website that made it appear so. So basically, my money was stolen by a fraudulent overseas company that really didn't buy or sell anything. So technically I don't know if this falls under a capital loss or not since it was fraud. It's similiar to a ponzi scheme but with a little different twist.
Tax Professional: Lev, Tax Advisor replied 3 months ago

binary options contracts are generally classified as securities.

I do not think the IRS woudl classify these as section 1256 contacts....

But even these are properties - that makes no difference fro reporting.

Even if that was a fraud - you still may report your capital loss.

The disadvantage here will be that if you do not have any other capital gains - only up to $3000 may be used against other taxable income.

And the rest will be carried forward to the following tax year.

If you are looking for larger deduction and in one single year - you may want to classify that as a fraud - but generally you should able to support such position.

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