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I had some funds held in trust by a financial company. Due to malfeasance customer funds went missing and the company went bankrupt. The bankruptcy is going through its course and it looks like the creditors such as myself will get back some fraction of their funds.

How do I treat this from a tax perspective? For example, let's say I get back 40% of my funds. Is the 60% I lost considered a deductible loss of some kind?

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You use Form 4684. enter image description here

Unfortunately, it doesn't flow through Schedule D to offset gains, but through Schedule A, itemized deductions. Depending on your current itemized total, some or all of your loss made not benefit you. (e.g. if you don't already itemize, you need to first pass the threshold for your filing status, $6350 single, $12,700 married.

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  • That makes it useless to me because the amount is large, six to seven figures. – Five Bagger Mar 3 '17 at 14:32
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    No, just the opposite. If you were married everything above the 12,700 becomes an itemized deduction for you if you had no other deductions in the first place. And if it zeroes out your income I believe the balance can carry forward but I'm not at the computer right now – JTP - Apologise to Monica♦ Mar 3 '17 at 14:34
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In addition to the form JoeTaxpayer pointed you to, I recommend that you look at IRS publication 547 which includes instructions on how to obtain tax help for deducting losses. If the loss is greater than your income, you have a Net Operating Loss which can be carried forward to reduce your taxes in future years as well.

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