How to claim bad investment write-off?

[miernikcx]

I have to repost my question because the answer is not related to my question in my previous post.

https://ttlc.intuit.com/community/taxes/discussion/where-to-claim-bad-investment-write-off/00/298456...

I have some investments on notes issued by an online platform. One of the notes got defaulted, and the underlying borrower went bankrupt. The platform sent email to investors, saying they decided to write down 100% of the note value, because they don't think there would be any recovery value of the note.

In this case, can I claim this as capital loss? However, the online platform didn't send 1099-B for this defaulted note, how should I claim it in TT?

In this case, can I claim this as capital loss? However, the online platform didn't send 1099-B for this defaulted note, how should I claim it in TT?

[PattiF]

You can claim this in TurboTax by entering the information in the Investment Income section without receiving a 1099-B.

To enter the information without a 1099-B:

• In TurboTax, click on Wages and Income
• Scroll down to Investment Income
• Choose Stocks, Mutual Funds, Bonds, Other and select Start or Update
• The first screen will ask if you sold any investments during the year, answer yes
• Did you get a 1099-B or a brokerage statement for these sales? Answer No
• Tell us about the sale, Click I'll enter one sale at a time
• The drop-down boxes can be filled out with the details of the stock sale

Make sure that you keep all of your records for the purchase and correspondence with the online platform in case the IRS were to have questions.

This example shows how a long term loss without a 1099-B is entered in TurboTax Online. Select your investment type.

[miernikcx]

Thank you.

For this particular investment, I didn't really sell it. The online platform just said it got written-down. Is this still considered as 'sale' for tax purpose?

[DianeW777]

A worthless stock or investment is entered like a sale of an investment on your tax return in the year it becomes worthless.  Follow the steps provided by our Tax Expert @PattiF to enter your capital loss.  Keep all of the documentation with your tax files should you need it later.

If you should recover any of your cost/loss in a later tax year use the information below for how to handle it on your tax return for that future year.

Tax benefit rule.  IRS Publication 525

You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year.

[miernikcx]

Thank you! @DianeW777 and @PattiF 

One more related question. One of my investments on structure notes actually defaulted in 2019. However, the underlying company didn't file bankrupt, and platform is still pursuing lawsuit against the company as there was fraud involved.

In this case, how do I decide in which year the investment becomes worthless? Actually, I don't think there will be any possible recovery, but I cannot provide any evidence either.

[HelenC12]

You can deduct the investment in the tax year it becomes completely worthless. This normally happens when the corporation files for bankruptcy, stops doing business, and has no assets. Financial difficulties won't make it worthless unless there is no hope that the company will pull through.

Additional information: Can I Take a Tax Deduction for a Bad Investment?

[miernikcx]

Thank you @HelenC12 

It seems the most important thing is to prove that the investment is completely worthless. I cannot find any bankruptcy filing. But the underlying company CEO has been sentenced to jail due to fraud, and the business was no longer running. I don't find any information whether there is an asset to be liquidated. But it has been 3 years w/o any recovery. In this case, is the evidence strong enough to claim the investment is worthless?

[Vanessa A]

Yes, that should be sufficient to decide that your investment is completely worthless. At this point, the question would be when did it become completely worthless?  When did the business cease operations?  When was the CEO sentenced?  If it was not in 2022 that it became completely worthless, then you would need to amend your return for that year to claim the deduction. 

[miernikcx]

Based on the information I found online, CEO pled guilty in 2020 and was sentenced in 2021. Regarding business, it seems when fraud was found in 2019, business should stopped running since then. In this case, which year should I consider the investment worthless?

[RobertB4444]

The investment becomes worthless in the year that you are certain none of it will be returned to you.  This can be tricky to figure if there are lawyers involved and lawsuits to try and recover damages from the assets of the company.  You declare it as worthless in the year that all that legal action is complete if there is any going on.

If there isn't any legal recovery attempt for you then your investment became worthless in either 2019 or 2020 and you should amend the return for that year.

@miernikcx 

[miernikcx]

Thanks @RobertB4444 

Ok. I can amend the 2020 year return. But if I do that, do I need to amend all the subsequent years' returns, since the refund number for 2020 gonna change?

[AmyC]

Your refund for 2020 has no effect on subsequent returns - usually. If this amended return changes carryovers, you will need to amend subsequent returns. I recommend starting with 2020 as that is when the CEO was found guilty.

See:

• how to file an amended return
• I need to amend my state return.