Chapter 7 Bankruptcy IRS Debit 7 Capital Loss

Question

I have a capital gains loss of $250K and an IRS debt of $200K, this happened through series of mistakes. Explained in detail here. My question is I was told that filing for Chapter 7 bankruptcy will wipe any IRS debit I owe, first of all is this true?

Second question is with a Chapter 7 bankruptcy do I still get to keep my capital loss -to be used as deductions if there is any future income?

Answer 1

There are certain criteria that must be met in order to file for Chapter 7 bankruptcy. However, to answer your questions:

Yes, you can wipe tax debt if and only if all the following are true:

• The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
• You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade
  paying taxes, such as using a false Social Security number on your
  tax return, bankruptcy can't help.
• The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
• You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for
  bankruptcy. (In most courts, if you file a late return (meaning your
  extensions have expired and the IRS filed a substitute return on your behalf), you have not filed a "return" and cannot discharge the tax.
  In some courts, you can discharge tax debt that is the subject of a
  late return as long as you meet the other criteria.)
• You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

However, this will not wipe out prior recorded tax liens. So it'll stop the IRS from going after your wages, but it won't wipe an existing lien on your property.

As for capital losses:

The amount of discharge debt excluded from income reduces the debtor’s or estate’s tax attributes in the following order:

...

3. Capital losses and carryovers. This includes any capital loss for the discharge’s tax year and any capital loss carryover under IRC 1212 of the discharge year.

...

As always, the things you read on the internet are not always true. My best advice is to speak to a bankruptcy lawyer.