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Tax Implication - Loss of a portion of Capital contribution

  1. Hi,

    I was wondering if you could somehow claim a loss on your taxes if you lose a portion of your capital contribution.

    e.g. somebody paid up $25,000 and loses $5,000 of it.

    Can the 5,000 be deducted as a loss somehow? Also is this treated different because it is after Tax money.

    Any help would ne appreciated
  2. USA Federal tax law allows a deduction for many items such as you partially described. Depending on the facts and circumstances the party who saw the value of his investment/business decline may get an immediate tax deduction or tax credit, or a deferred tax deduction, or possibly no deduction at all... it all depends on the situation.

    For many stories like the one you describe, there is a Schedule K-1 issued that helps identify the federal tax implications for you.
  3. Generally short term capital losses are limited to $3000 per year. (If you have long term capital gains, you can use short term losses to offset them. In fact, I think you are required to do so.)

    You can carry the additional $2000 loss forward and deduct it in future years, if you don't meet the $3000 maximum in that year. I think the time limit is 8 years. So, for instance, if you lose $1000 in short term capital losses in 2006, you could use the $2000 carryforward from 2005 and deduct $3000 in 2006.

    If you are a pattern daytrader, you can also elect "mark to market" accounting method at the beginning of the tax year, i.e. on or before April 15. Then, there is no limit to the amount of short term capital losses you can deduct. However, you lose any old capital loss carry-forwards (since you now account for gains and losses as ordinary income).