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Why do we have to pay taxes on an investment that lost money??

So I got one of those dreaded big fat envelopes mailed to me from the IRS. Yeah, you know the one. Not to worry, the amount I owe (due to a mistake I made in my taxes) is about what you would spend for a ticket to a high end show. Nothing to panic over.

What went wrong is that I just don't understand how investments work. And I still don't!!! My money market account has lost almost half its value in the recent economy crash. That thing bleeds money like an open wound so I figured anything that loses money you can't possibly owe money to the IRS for, right? Wrong. It also doesn't help that the Money Market account didn't mail me my 1099's. So in my mind I had nothing but lots of lost money and nothing there to report.

What I found out is that even if you lose some, all or most of your money in an investment you still are earning at least some dividends. And I was supposed to pay taxes on those dividends. So what I'm wondering is, how the heck am I not allowed to write off the loss on the investment as a loss and instead having to pay taxes on the dividends - especially when the dividends don't bring me even close to what the original amount of the investment was before it tanked?

Comments

It's my fault for not knowing I was supposed to report it to my accountant. I never got any 1099's, how was I supposed to know? I thought it was just like my Roth IRA, one of those accounts you never have to report because it just sits there and loses more and more money every year until you finally get a fraction of what's left when you retire.
It's also entirely likely that there are realized losses - the IRS doesn't generally track this. And capitol gains losses roll over from year to year.
What is a capitol gains loss?
I should have said "Capitol Losses" but -

Basically any time something is sold for less than the price it was bought for. It gets complicated with some managed accounts, because it will be the price it was originally bought for, which can sometimes be before you were involved with the account, so not the price you paid going in, IIRC. But basically the IRS will figure all your stuff based on things that they can see - which is things like dividends paid, and the price things sold for. Whereas the price things were bought (which can mean that things were sold at a loss rather than a gain) are invisible to them.

The specifics will have to do with the specific kind of account, but the general message is that even if you should have filed, it's entirely possible, even likely, that going over this and filing now will in the long run help you. (It might not, but the IRS doesn't try to be particularly thorough on your behalf.)