Capital losses from unpaid debts in insolvency proceedings

The Dirección General de Tributos (DGT) has issued a ruling regarding the tax treatment of losses suffered by creditors when a debtor enters insolvency proceedings and the outstanding debts cannot be collected.

What the DGT has ruled

The inquiry focuses on how to declare capital losses when the taxpayer, due to their status as a pensioner, is not required to file an income tax return. The analysis is based on the application of Law 35/2006 on Personal Income Tax (LIRPF) and Law 22/2003 on Insolvency Proceedings.

The criteria establish that a capital loss occurs when the debt cannot be satisfied within the framework of the insolvency proceedings. For this loss to be tax-relevant, it must be included in the IRPF taxable base, thereby allowing for a reduction in the tax burden through the offsetting of income or capital gains.

What it means for you

If you are an individual acting as a creditor and are affected by the insolvency of a debtor who has entered insolvency proceedings, there is the possibility of recognizing a capital loss. This is especially relevant if the debt is not recovered in full following the resolution of the proceedings.

It is important to highlight that, although your income level as a pensioner may not legally obligate you to file an income tax return, the existence of a capital loss can be beneficial for reducing other income that is subject to taxation or for offsetting gains obtained in other tax years.

What you should do

In a situation of non-payment arising from insolvency proceedings, it is necessary to:

• Document the insolvency situation and the resolution of the insolvency proceedings that certifies the impossibility of collection.
• Evaluate whether declaring the capital loss results in tax savings, even if there is no legal obligation to file a return.
• Analyze the inclusion of said loss in the IRPF taxable base according to current regulations.

Each insolvency situation presents technical particularities that require a detailed analysis of the insolvency documentation.