Schedule D Capital Loss Help!
hello! I am 23 years old and filing taxes. As I learn more, I am finding new things I had forgotten in the past. My father passed away in 2020 and I inherited his 401k plans, 401b, brokeragelinks (do not know what I am talking about here, just listing what is on fidelity.) I closed the accounts by the end of 2023 and cashed out around 5k, it was taxed.
My question comes to the capital loss that happened from receiving to the point I closed and withdrew. There was over $15,000 in unrealized capital loss at the time I withdrew. Is this just a loss due to poor investment and I have no reconciliation process for this? Or does this Schedule D form (or any other form) help me receive a refund / tax break due to these losses?
Thank you for your time!
Erik
Answers
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Hello Bagheerik and thank you for your question. Sorry for the loss of your father.
Unfortunately, the capital losses that you realized upon selling the securities in the 401(k) account and the 401(b) which you inherited from your father are not deductible losses. Therefore, the $15,000 in losses that were realized when you sold the securities are not losses you can claim on your tax return.
These retirement accounts—401(k) and 401(b)— are tax advantaged, meaning they are generally funded with pre-tax dollars. Because they are funded with pre-tax dollars, the account owner has already received a tax benefit and thus, when funds are withdrawn, those funds are subject to tax. Any losses are non-deductible, even for those, such as yourself, who have inherited the retirement accounts and proceeded to sell securities in order to withdraw the funds.
While your losses from the retirement accounts are not deductible, you might consider researching whether your father had funded his retirement accounts with post-tax dollars. If that were the case, then your father, and later you, would have a basis, or cost, in the account. In this context, basis, or cost, is just another way of saying that these funds are not subject to tax when withdrawn because they have already been taxed. In order to determine whether your father had funded his retirement accounts with post-tax dollars (or after tax money), you will need to contact the fund custodian or the fund administrator. Because it appears that the accounts were maintained at Fidelity, you would need to check with Fidelity.
We are not sure from your post whether you inherited a regular brokerage account, or a retail brokerage account. If you did, the rules are different regarding retail accounts versus retirement accounts. With an inherited retail account, you get a step-up in basis, which essentially means your basis, or cost, is the value of the inherited security(ies) on the day of death of your father. When these types of securities are sold, you could realize a capital loss or a capital gain.
Let us know if you inherited a retail account or regular brokerage account and we will follow up with additional comments. If you have other questions, please follow up with those as well.
Please keep in mind that with any follow-up questions, do not include any personally identifiable information.
Sincerely,
George, EA
Tax Pro
