Tax Return: How Should You Report Your Stock Losses?

Dear Investors,

As part of the preparation of your tax return, we would like to bring to your attention some general principles regarding the treatment of any losses related to investments in stocks.

The information below is general in nature and provided for informational purposes only; it does not constitute tax or legal advice, a personalized recommendation, or an incentive to report a loss. It is the responsibility of each investor to consult a professional to obtain advice tailored to their specific situation and investments before making any decision or filing a tax return. Raizers shall not be held liable for the use of this information.

For individuals who have invested in stocks

Unrealized capital losses—that is, those that have not yet been actually realized—cannot be deducted or offset.

Permanently recognized capital losses (permanent capital losses) may be offset against income of the same nature, that is, capital gains on securities. It is up to each investor to determine whether a permanent capital loss can be recognized in their specific circumstances.

What amounts could be charged in the event of a permanent loss of shares?

Only losses recognized in the following scenarios are included:

- Sale of shares;

- Involuntary cancellation of shares in connection with court-ordered reorganization or liquidation, or in connection with the early dissolution of the company due to losses equal to or greater than its equity.

Losses incurred in a PEA cannot be used to reduce taxable income.

The deductible amount is limited to the purchase price of the shares, less, if applicable, any tax credits applied to them (e.g., the IR-PME tax credit, also known as the Madelin tax credit).

If you received an IR-PME tax reduction, also known as the “Madelin Reduction”

The Madelinn’ Discount is not affected in the event of an involuntary cancellation of shares, the transfer of shares as part of insolvency proceedings, the reimbursement of a capital contribution following the company’s judicial liquidation, or the sale and reinvestment of the sale proceeds under the conditions set forth in the General Tax Code.

In all other cases, if the shares are sold before the end of the 5-year period required to qualify for the Madelin tax reduction, the deductible loss is limited to the purchase price of the shares, less the tax reduction received. The amount of the tax reduction received must be calculated and reported in box 8TF of Form No. 2042-C.

‍How is the allocation treated for tax purposes, and what tax return must be filed?

The permanent loss is attributable to:

- On gross capital gains on securities in the year of the sale or cancellation of the shares

- In the event of a surplus, on the gross capital gains on securities for the following ten years, including the tenth year.

As an exception and at the taxpayer’s option, in the event of cancellation due to judicial liquidation, the deduction may be taken in the year the judgment commencing said liquidation is issued.

Depending on each taxpayer's specific circumstances, losses are generally reported as follows:

If the shares have been canceled, you will be asked to include the following with your declaration:

(i) the calculation used to determine any capital loss

(ii) proof that the judgments have been made public (a copy of an excerpt from the judgments or of one of the formalities ensuring that these judgments are made public)

(iii) a copy of a document verifying the number of shares held as of the date of the judgment.

A loss resulting from the sale of shares will be reported in box AN of your IFU, while a loss resulting from the cancellation of shares does not need to be reported on the IFU.

 [1] Where year N is the year in which the shares were sold or canceled

For corporate entities subject to corporate income tax that have invested in stocks

Generally speaking, shares held by a corporate investor subject to corporate income tax are classified as investment securities. However, if they have been recorded as equity securities, a specific tax regime applies. It is up to each investor to determine whether a permanent capital loss can be recognized in their particular situation.

A - For investment securities

How are unrealized capital losses (non-final losses) treated for tax purposes?

Each year, the net asset value of the shares (value as of December 31) must be compared to their original value (purchase price). If the net asset value is less than the original value, the loss is treated as an unrealized capital loss, which is tax-deductible.

The company may then recognize an impairment allowance, representing the loss in value, without the need for any off-balance-sheet adjustments.

How are permanent capital losses treated for tax purposes?

A loss becomes permanent upon the sale or cancellation of the shares (permanent capital loss). If an impairment allowance had been recognized, it must be reversed.

The permanent loss must be recognized as an expense, without any off-balance-sheet adjustments.

A loss resulting from the sale of shares will be reported in box AN of your IFU, while a loss resulting from the cancellation of shares does not need to be reported on the IFU.

Specific rules may apply if you have received a tax deferral under Section 150-0 B ter of the General Tax Code.

B - For equity securities

If shares are classified as equity securities, unrealized capital losses (losses that are not final) are not tax-deductible. They give rise to an accounting provision that is offset by an off-balance-sheet adjustment. Reversals of these provisions are not taxable.

Permanent capital losses are not tax-deductible. They are recognized in the financial statements and must be adjusted off-balance sheet.