Investment legal fees added to basis?

Yes, they add to your cost basis, so 115k. However, it depends on the nature of those legal fees.

BEGIN QUOTE publication 551 ("Basis of Assets")

Cost Basis

The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for the following items.

Sales tax,

Freight,

Installation and testing,

Excise taxes,

Legal and accounting fees (when they must be capitalized),

Revenue stamps,

Recording fees, and

Real estate taxes (if assumed for the seller).

END QUOTE

Another part says you can include "Legal fees (including title search and preparation of the sales contract and deed)". Granted, this wording applies to housing.

Legal fees with acquiring a loan are not deductible.

If you bought 100k of stock in a C corporation and the stock was section 1244 stock, then you can deduct the loss as an ordinary loss, up to 50k of loss of single, and 100k if married.

If it is normal stock, then you can only deduct 3k every year.

I should have said lent rather than invested. Actually it was a note, and they repaid $30,000 of it before going bust. I have collateral worth perhaps $30,000, so once I sell that, my loss will be 43,400.

I assume I can deduct that as a bad debt? My understanding is that I can't deduct it until I liquidated the collateral. I hope that is correct.

Then sounds like a 115k non business bad debt. The non business part is because you, a person, lent your money to a business. (If the business itself had a debt, then it is business bad debt). Non business bad debt is deducted as a short term capital loss on Schedule D. See

and publication 550. >From your earlier email it seems you recovered some of the money. Now a short term capital loss of 115k sounds like a lot, but you can only deduct 3k a year and carry over the remainder to next year; but you can also balance the loss with other capital gains. BEGIN QUOTE Topic 453 - Bad Debt Deduction

If someone owes you money that you cannot collect, you may have a bad debt. For a discussion ...

There are two kinds of bad debts ? business and nonbusiness.

Generally, a business bad debt is one that comes from operating your trade or business.

...

...

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt.

A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show ...

A nonbusiness bad debt is reported as a short-term capital loss on Form

8949 (PDF), ...

For more information on nonbusiness bad debts, refer to Publication

550, Investment Income and Expenses. For more information on business bad debts, refer to Publication 535, Business Expenses.

END QUOTE

I didn't want to complicate it, but I lent $100,000 secured by gems. I sold off $30,000 of the gems to pay back the loan, then they defaulted, so I got the balance of the gems; probably worth another $30,000. So I am out about $40,000 on the loan and my legal expenses in making the loan (which I looked up and they were only $4,000, not $15,000; thank God...)

So my question is (assuming I eventually sell the remaining gems for $30,000) is my loss $40,000 on the loan, or $44,000 for the loan and the legal expenses?

I think it is 44k as legal fees in acquiring the stock (here gems) is added to the cost basis.

Sorry for the late response on this....

I disagree about the $4K legal fees. As this was a loan of $100K, the basis in the loan is $100K. The legal fees are a misc. itemized deduction on Schedule A (expense incurred for the production of taxable income) that should have been deducted in the year incurred. If that year is no longer open, then it is too late to amend that year's return.

Your nonbusiness bad debt writeoff would be $100K minus $30K minus what you net for the sale of the collateral.

But publication 551 says

BEGIN QUOTE publication 551 ("Basis of Assets")

Cost Basis

The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for the following items.

Sales tax,

Freight,

Installation and testing,

Excise taxes,

Legal and accounting fees (when they must be capitalized),

Revenue stamps,

Recording fees, and

Real estate taxes (if assumed for the seller).

END QUOTE

The property he bought was gems, and the legal fees are added to the basis.

He send he made a loan of $100K and incurred legal fees. He did not buy gems. The gems were collateral for the loan.