How can I write off losses from a reverse stock split?

This answer was provided by Mark Misselbeck, CPA, Levine Katz Nannis & Solomon PC, Needham.

Q: I have a $49,900 stock loss from an investment in my old start-up company. They had a reverse stock split and purchased my shares back from me at $102. How can I write off some of these losses if I don't have any stock gains to offset them against, can I write off against something else? --Mike, Natick

A: The reverse stock split has no impact on the deduction.

Presuming this occurred with calendar year 2003, what you have is normally a capital loss. Without any capital gains, you may only claim a deduction of $ 3,000/year on your federal return and up to $ 2,000/year against interest and dividends (if you have that much) on your MA return.

One thing that you should investigate is whether or not your loss qualifies for treatment under Section 1244 of the federal tax law. You need to have purchased your shares with cash or property (not received them as compensation). You must have been the original acquirer. The company must have had a limited capitalization at the time your purchased your shares. And the company must have been an operating company, rather than an investment or holding company. If all of these qualifying tests are met, you could claim the loss under Section 1244, in full, up to a limit of $ 50,000 (for returns other than married, filing jointly or $ 100,000 on a return filing as married, filing jointly) for your federal return. MA does not provide for this treatment.