Expert: Mark J. Markus- California Bankruptcy Attorney - 8/4/2009

Question
QUESTION: Hi Mark,

Here's the situation I'm hoping you can advise on:

During the means-test period, I bought and sold some stocks in four different accounts: two are Roth IRAs, one is an HSA, and one is a taxable account. In each account, some trades produced a gain and others produced a loss.

My question is whether the gains and losses can all be added together thereby producing a net loss. On the other hand, if the gains are to be counted as income but the losses cannot be used to offset the gains, then I will not qualify for Chapter 7. It seems rather unfair to count the gains as income but not count the losses as a reduction in income.

Thanks so much for your expertise.

Regards,
Dan

ANSWER: I would take the position that only the capital gain portion derived during the relevant 6-month period is considered income for the means test.  I don't think you can use a loss derived in one stock to offset a gain in another, unless you are in the business of trading stocks and you can then use it as a business income/expense scenario.  Interpretation of anything related to the means test can vary from jurisdiction to jurisdiction so you should check with a qualified bankruptcy attorney in your area for more specifics.

http://www.bklaw.com/

---------- FOLLOW-UP ----------

QUESTION: Thanks so much for the reply, Mark. A follow-up: I used stock investing as a major part of my income for the last 2-3 years. I did my own research, spent considerable time, and made more income investing than through employment. In fact I was not employed during a significant part of those years. Can I reasonably claim that trading stocks was, and is, a business for me?

Also, do you agree that it's unfair to count gains in one stock as income but not count losses in another stock as a reduction in income? Seeing as my wife and I have both lost our jobs, might this all be viewed as a special circumstance and thus permit the Chapter 7?

Thanks again!  Dan

Answer
I doubt it.  Trading stocks in a Roth IRA and HSA account are probably not going to be considered part of a business, but you'd really need to consult with your accountant to make that determination.  As far as fair or unfair goes, if there's one thing that's certain about the means test and the new laws under BAPCPA, it's that fairness and logic have nothing to do with any of it.

The only way you'd be able to use losses to offset gains would be if it's part of the same business, IF it's a business.  For example, a lot of people have rental properties that lose money.  They receive, for example, $1,000 a month of rental income, but the mortgage on the property is $1,500 a month.   They can offset the $1,000 of income with the mortgage payments, but they can't use the extra $500 loss each month to avoid paying their other creditors, in my opinion.   However, as I said before, different courts handle this differently, so you need to consult with an attorney in your area.