Capital loss on ESOP stock? Maybe...
— -- Q: Can I take a capital loss on my shares in an Employee Stock Ownership Plan (ESOP) if the company was bought out while under bankruptcy protection?
A: We're all becoming experts in capital losses.
With stocks falling, corporate bankruptcies rising and the value of corporate and municipal bonds falling, sometimes the only silver lining is being able to deduct a capital loss on your tax return.
You can get a bit of a boost at tax time if you wisely harvest capital losses in taxable accounts. First, you can use capital losses to offset capital gains. If you have more losses than gains (anyone?), and you file a single or married jointly return you can deduct up to $3,000 a year in excess capital losses against ordinary income. The deduction is $1,500 per return if your status is married filing separately. But the key is we're talking taxable accounts here. Not IRAs or 401ks.
And you're talking about an Employee Stock Ownership Plan, so the rules are different. ESOPs are qualified retirement plans, like a 401(k) plan, says Mark Nash of PricewaterhouseCoopers and co-author of PricewaterhouseCooper's 2009 Guide to Tax and Financial Planning.
In a qualified retirement plan, contributions are made with pre-tax dollars. So, the only possibility of loss would occur once the plan was distributed back to employees and you received less than your after-tax cost basis in the plan, he says. "In this case, there is an argument for a loss," he says.
The rules can get even more complex if the ESOP qualifies for replacement securities treatment. Here, too, you may qualify to take a capital loss.
Due to the complexity of this issue, it may be a good idea for you to consult a tax professional who can help you determine what kind of tax treatment your ESOP loss would get.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.
