A: No, you cannot deduct as theft losses the amount you invested in Enron stock that is not covered by the reimbursement.
The Internal Revenue Service stated in an April 19, 2004, notice that it would "disallow such deductions and may impose penalties" on taxpayers who claimed theft loss deductions for "the decline in market value of their stock caused by disclosure of accounting fraud or other illegal misconduct of the officers or directors of the corporation that issued the stock."
The tax code limits losses for individuals to:
• Losses incurred in a trade or business.
• Losses incurred in any transaction entered into for profit outside of a trade or business, which are called capital losses.
• Losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from theft or casualties, such as fire, storm and shipwreck, which are called theft or casualty losses.
In its notice, the IRS cites several judicial rulings that have found that capital losses do not become theft losses, even when a stock becomes worthless because of "corporate officers misrepresenting the financial condition of the corporation, even when the officers were indicted for securities fraud or other criminal violations."
You can challenge that determination by filing a lawsuit and proving in court that the "loss resulted from a taking of property that is illegal under the law of the state where it occurred and that the taking was done with criminal intent."
Otherwise, claim a capital loss.
Capital losses are deducted first from capital gains, and then again up to $3,000 of other income. Any amounts of the loss remaining can be carried over into future tax years. A carry-over loss may be deducted from capital gains in later years plus up to $3,000 of ordinary income.
