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Question:


I have a substantial loss carry forward from an investment in a private company that was sold for pennies on the dollar. What are the rules around deducting this on my tax return?
-G. Lopez


Answer:


It depends what you mean by a private company. I’ll assume that you’re referring to one that isn’t traded on a stock exchange. Most likely, you’re talking about so-called Section 1244 stock. This is stock issued by a domestic small corporation that has ordinary business activity, so it’s not a shell company for making passive investments, collecting royalties and so forth. Section 1244 stock must have been issued to you directly, not bought and sold a few times or distributed through a partnership. If both of these apply to your case, then you can deduct from ordinary income whatever you lost up to $100,000 if you’re married filing jointly, $50,000 otherwise, in the year that the loss occurs.
If your loss is more than that, then it carries forward to future years, but as a capital loss, not an ordinary loss. That means you’ll be able to write off $3,000 a year, tops, until it’s whittled away. If, on the other hand, your income for the year is less than the loss on the stock, then you have a “net operating loss” that you can carry back up to two years or carry forward up to 20 years. Say you report an $80,000 loss on the stock this year and you only have $50,000 in income. You can redo your tax returns for the last year or two to reduce stated income by $30,000 and get a refund, or you can take the write-off in future years, presumably ones where you have a lot of income and your top tax rate is likely to be higher than usual.

-Conrad de Aenlle



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