Are assets lost in a bankruptcy valued at the time of loss, or according to current value?

Question

For the purposes of claiming a casualty loss in tax filings, can stocks be valued at their current par or is their value only what it was at the time of the loss?

My situation is that I have stock that was held by company that went bankrupt due to fraud. The bankruptcy trustee has valued the loss of the account holders, including myself, according to the value of their holdings at the time of the bankruptcy. So in other words, my stock was worth, say, $100,000 at the time of the bankruptcy, so according to the trustee my claim against the company is for that amount.

However, for tax purposes, eventually I will be able to declare a casualty loss because fraud was involved. I will claim this loss when the bankruptcy is settled. So, for example, lets say that in the settlement I get $50,000. Then, against my creditor claim I have lost $50,000. However, let's say the value of the stock lost has gone up to $300,000 in the meantime.

Can I claim a $250,000 loss to the IRS, or can I only claim the creditor loss of $50,000?

More Info

Note that this question revolves around Casualty Loss deduction.

Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which you can determine with reasonable certainty whether or not you'll receive such reimbursement.

Because of this I cannot estimate the loss until the bankruptcy settles. The IRS guidance says the following:

The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.

So, it comes down to how the "adjusted basis" is to be calculated.

Note: I did not have stock in the company. They were holding the stock and other assets for me and other clients as a trustee. They STOLE stock and money belonging to their clients. They were apparently planning to later buy it back so noone would ever know, but they went bankrupt before that happened. So me and the other clients essentially have a claim on a bankrupt company. Eventually when the bankruptcy settles, the clients will get back some fraction of their assets. For non-monetary assets (like stock), the bankruptcy trustee has valued them at their market value at the time of the bankruptcy.

Answer 1

You are not the person or entity against whom the crime was committed, so the Casualty Loss (theft) deduction doesn't apply here. You should report this as a Capital Loss, the same way all of the Enron shareholders did in their 2001 tax returns. Your cost basis is whatever you originally paid for the shares. The final value is presumably zero. You can declare a maximum capital loss of $3000, so if your net capital loss for the year is greater than that, you'll have to carry over the remainder to the following years.

IRS publication 547 states:

Decline in market value of stock. You can't deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. You report a capital loss on Schedule D (Form 1040). For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Pub. 550.