Investment Losses Due to Holding Company's Bankruptcy

[princessleia]

I had precious metals stored with a company and say I plonked down $25K buying it from the company and then I had them stored with the company. The company declared bankruptcy (there were very little precious metals in their vault). Anyway, I am listed as a creditor in the bankruptcy with a claim of say, $15K. How do I treat my losses on my tax returns? Some issues are:-

1. The initial loss of $10K from what I plonked down and the claim. Capital loss? But then I did not sell it. Will it be casualty losses? To me. bankruptcy is a casualty event but I do not see it being defined in IRS publication. 

2. I do not know what I will get after bankruptcy. I do not have much hope. So, say I get only $1K. What then?

Appreciate all input from the tax accountants tax pros.

[Ombud]

Was it a Ponzi scheme?

Theft Losses from Investments in “Ponzi” Schemes: Tax ...
www.irs.gov/uac/Theft-Losses-from-Investments-in-“Ponzi”-Schemes:-Tax-Treatment-of-Distributions-Rec... - February 10, 2015

[princessleia]

No, not a Ponzi scheme. But I suspect fraud was involved....the company just swallowed up our monies. 

[rangerj]

The loss is deductible once the amount of the loss becomes "fixed and determinable", generally once the bankruptcy court declares what you will get as a creditor, e.g. $0.10 on the dollar.

[taxref]

Adding a bit to Rangerj's answer, you would be looking at a capital loss of $24K ($25K investment less $1K distribution by the bankruptcy trustee).  

Assuming its all a long-term loss, you can count the loss against any capital gains you have, and up to $3K each year against ordinary income.  If there is any amount remaining, the remaining loss is carried forward to future years.  The same treatment (counted against capital gains and up to $3K of other income) is repeated each year until the carry forward is used up.

If it is determined that fraud/theft, etc. is involved, you may qualify to claim the loss as a theft loss.  Theft losses are treated the same as casualty losses for tax purposes.  Because of restrictions (must itemize, must reduce by $100, can only claim amount in excess of 10% of AGI), casualty and theft losses are often not the most favorable deductions.

[mwcpa]

I concur with Ranger and the ref.