Stock Theft Loss

Today we hear from Sal in New York who’s angry, “After the smoke from subprime mortgages starts to clear, if CEO’s are convicted of fraud and sentenced to prison terms, do investors’ stock losses created by the CEO’s criminal actions fall under IRS regulations of capital loss or embezzlement? Do taxpayers have the option to select the most beneficial of these two categories?”

Hi Sal,

You have my total and empathetic, passionate sympathy.

But no. It’s a capital loss, pure and simple. Report it on Schedule D.

Unless the investor bought the stock directly from the principals of the company, or due to a personal relationship with the principals of the company who were convicted, you’re not likely to get IRS to accept the Stock Theft Loss concept. We’ve already tried that.

And this is how IRS responded, with Notice 2004-27.
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Read this – ALL the way to the end:

The last part of this is where you’ll find the potential casualty loss deductions.

I still think IRS is wrong about this and that someone with a significant loss should take this to the court.

Some of us believe that if this were brought to a court of law, in cases where the officers of the company were convicted of Federal or State felonies, that the definition of theft in the Tax Code would cover these losses.

But unless someone is prepared to litigate this issue, I strongly urge you not to take stock theft loss deductions. Just report it as a plain, old ordinary capital loss, subject to the annual $3,000 limits on capital losses.

And remember, you can find answers to all kinds of questions about stock theft losses and all kinds of other tax issues, free.
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