Q: If your bank fails and you have a Certificate of Deposit that exceeds the amount covered by the Federal Deposit Insurance Corp., what's the tax treatment for any money you lose as a result? Can you treat it as a capital loss on your federal income tax return? -- BC, via e-mail
A: Yes.
There is a specific provision in tax law for this situation, says Barry C. Picker, a Brooklyn New York tax accountant and financial planner.
You could claim the loss as a non-business bad debt. Or you could claim it as a miscellaneous itemized deduction to the extent that it exceeds 2 percent of your adjusted gross income. "In most cases, the non-business bad debt would be the best option because there's no threshold to cross," he says. "It would be a short-term capital loss on schedule D, and it would offset any capital gains you have, dollar for dollar."
In other words, a $12,000 capital loss would wipe out the tax on a $12,000 capital gain.
If you have no capital gains, you can use up to $3,000 of a capital loss to reduce your ordinary taxable income this year, and carry forward any balance to use against next year's income.
But don't be too sure you won't have any 2008 capital gains! To meet redemptions as shareholders cashed out of the plummeting market, many mutual funds sold holdings on which they made a profit - and they pass those taxable gains to their shareholders. The upshot: Even if your mutual funds were crushed last year, they may present you with a tax bill.
On the bright side, of course this doesn't apply to funds you hold in a tax-deferred retirement account. You can’t claim capital losses in a tax-deferred account, but you don’t pay taxes on capital gains there either.
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