How to write off different types of investment losses on taxes - angel investment, startup equity, and stock losses

Thanks for the detailed explanation. I've never heard of Section 1244 before. How do I know if my angel investment qualifies? The startup was a small software company with fewer than 10 employees if that matters. Also, for the deferred salary situation, would claiming it as a business bad debt be more advantageous than a capital loss?

For Section 1244 qualification, the company needed to be a domestic small business corporation where the total money received for stock didn't exceed $1 million. The company should have derived more than 50% of its income from operations (not investments). You'd need to check if they issued you qualified small business stock documentation. Business bad debt would be more advantageous since it's deductible as an ordinary loss without the $3,000 annual limitation. However, it's harder to qualify for - you'd need to prove there was a valid debt (not just equity) that became worthless. The emails and paystubs help, but a written agreement would have been better. A good CPA can help determine which approach has the strongest support based on your specific documentation.

Does this actually work for complex investment loss situations? I've got some worthless securities from a tech startup that failed and my tax software doesn't seem to handle it well. Can it tell me specifically which forms to use for claiming these types of losses?

I'm skeptical about these tax tools. How does it handle the documentation requirements? My concern with investment losses is always proving to the IRS that the investment actually became completely worthless. Does it give guidance on what documentation you need to keep?

It absolutely works for complex investment situations like worthless securities. It specifically guided me on using Form 8949 for reporting my losses and explained how to code them correctly. It also showed me how to attach a statement explaining the worthless security claim, which my regular tax software never mentioned. For documentation requirements, that's actually where it really shines. It gives you a detailed checklist of exactly what you need to prove your case to the IRS - things like company bankruptcy filings, final stockholder communications, or evidence the company ceased operations. It saved me from an almost certain audit by making sure I had everything properly documented before filing.

How does this actually work? I thought the IRS phone system was completely broken. Are they just auto-dialing constantly or something? Seems too good to be true.

This sounds like snake oil to me. I've tried everything to get through to the IRS including calling at weird hours. There's no way some service can magically get you through when millions of others can't. What's the catch?

It works by using a system that navigates the IRS phone tree automatically and holds your place in line. When it reaches an actual person, you get a call connecting you directly to that agent. No more listening to hold music for hours. There's no catch - they just solved a really frustrating problem with technology. I was skeptical too until I tried it. The difference is they're monitoring multiple lines simultaneously and can connect you when one opens up. I've now used it twice - once for the investment questions and once for a notice I received. Both times I got through to someone who could actually help within about 15-20 minutes.

Thanks for bringing up that point about timing. What kind of documentation would I need to prove the exact year my angel investment became worthless? The company slowly declined throughout 2023 but officially closed in early 2024. Also, I don't have many capital gains this year, but I might next year - would it make sense to carry over the losses?

For documenting the year of worthlessness, you'll want to gather things like the company's bankruptcy filing, dissolution documents filed with the state, a final letter to investors announcing closure, or evidence that assets were liquidated. The key is showing the investment had value at the end of 2023 but became worthless in 2024. Regarding carrying over losses, that's a good strategy. If you don't have significant capital gains this year, you can use up to $3,000 against ordinary income, and then carry forward the remaining capital losses indefinitely to future years. If you expect larger capital gains next year, having those carryover losses available could be very beneficial. Just make sure you're keeping careful records of your loss carryovers.

I had a similar situation. What worked for me was filing it as a business bad debt on Form 8949 with code G, and attaching a detailed statement explaining the arrangement. I included emails from the CEO confirming the salary deferral arrangement and proof the company was dissolved. The key was showing it was actually compensation I was owed, not just an investment that went bad.

This is really helpful advice about QSBS - I hadn't considered that angle at all. Even though my angel investment is now worthless, it's good to know it might still have future tax benefits if I make other QSBS investments. One question about the wash-sale rule you mentioned: if I sell my losing stocks to harvest the losses, how similar do the replacement stocks need to be to trigger the wash-sale rule? For example, if I sell individual tech stocks at a loss, could I immediately buy a tech sector ETF instead, or would that still be considered "substantially identical"? Also, regarding documentation - should I be requesting specific paperwork from the failed startups, or is it too late for that? I have some emails and investor updates, but I'm wondering if there are official dissolution documents I should try to track down from the state business registry.