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This is a real situation, but I will use fake numbers. Let's say I invest $10,000 in an investment trust and my shares eventually appreciate to the point where they are worth $60,000. This is not an equity position, but a debt position because my shares represent assets that are supposed to be held by the trust. Then something bad happens and the company goes bankrupt. The bankruptcy trustees assess the value of my shares at $60,000 (the amount the company owes me) and then announce that they are liquidating the company and paying out 1/3 of par value to the creditors, therefore I will receive $20,000. In this case I will ultimately get returned to me more than I originally "loaned" to the company, but I will lose a lot of what they owed me. Legally speaking I am a "creditor" of the company, not a "shareholder".

In this case, from a tax perspective (United States), have I suffered a gain or a loss?

(As an analogy, suppose a bank loans $500,000 to a business and according to the terms of the loan, the business ends up owing $600,000 including interest. But then suppose the business goes bankrupt and after the liquidation the bank is only paid $540,000. Has the bank had a $40,000 gain or a $60,000 loss? This is analogous to my situation.)

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    I am not an accountant, but is it really possible to make money and be categorized as a loss? – Taylor Edmiston Apr 4 '17 at 0:23
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    Not sure I see how this could be anything but a gain. Are you misunderstanding when you realize a capital gain? – Joe Apr 4 '17 at 1:13
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    I'm not sure your bank analogy works here because loan accounting is a little different and you are an individual on cash accounting. Individuals don't have the ability to assess themselves paper losses this way because you were never taxed on the gains. You put out $10k, you got back $20k, that's a cash gain of $10k, how the asset was valued between your purchase and sale isn't relevant. In your bank analogy the bank lent $500k based on original issue discount tax rules which generated a $600k asset and $100k of income realized over the life of the loan. – quid Apr 4 '17 at 1:23
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    What interest rate are you charging that $10,000 debt becomes$60,000 debt? – DJClayworth Apr 4 '17 at 1:24
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    I'm confused about how the investment is a debt - perhaps it's sophisticated beyond my knowledge, but an investment in shares is not a debt, and the cost basis was the cash you put in (or accounted value of goods, etc). Thus anything returned is a capital gain of final returned value, minus initial investment. If there is some more complicated arrangement that makes this not so, it would help if you could detail the arrangement a bit more. – BrianH Apr 4 '17 at 15:18
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I'll give the credit to @Quid in the comments section of the question.

You put out $10k, you got back $20k, that's a cash gain of $10k, how the asset was valued between your purchase and sale isn't relevant.

From an accounting perspective, the company is the only party that is realizing the loss (as they have sold the asset for 40K less than par). You the buyer, only get to see the initial buy and sale of such capital asset.

Example:
A company purchases a car for $20,000 and after depreciation it is worth (book valued at) $2,000. It is then sold to a customer for $3,000.
Does the customer realize a loss of $1,000? No.
Does the company realize a gain of $1,000? Yes.


Your bank analogy is flawed in two ways:

  1. We don't know how long this has transpired.
    If this all occurred in the course of a day, the bank would claim a 40K gain.
  2. We don't know if interest was included in contract.
    Some contracts include "You will pay 100K, in interest, when this comes due." If this holds true and the same example occurred, the bank would record a 60K loss.

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