White Paper

Tax-Informed Overview of the DivestMe Offering & U.S. Federal Tax Law Support

A detailed analysis of how DivestMe's documentation-and-transfer workflow aligns with federal tax requirements for loss recognition on illiquid private securities.

Important Disclaimer

This document is provided for informational and educational purposes only. It does not constitute tax, legal, or financial advice. DivestMe does not provide tax or legal advice and makes no guarantee that any loss will be accepted by federal, state, or local tax authorities. Tax outcomes depend entirely on each taxpayer's individual facts, circumstances, and accurate reporting. Taxpayers and their advisors should independently evaluate all transactions and consult qualified tax counsel before relying on any information contained herein. No IRS publication, ruling, or official guidance endorses DivestMe by name.

Executive Summary

DivestMe offers a service that purchases certain “illiquid, non-public investment interests” (including private company equity and related instruments) for a nominal amount when a taxpayer independently elects to sell such a position, and provides documentation of the resulting sale.

From a federal income tax perspective, DivestMe's offering is best understood as a documentation-and-transfer workflow that documents and memorializes a completed sale of a taxpayer's capital asset—a sale the taxpayer independently elects to make—rather than leaving the taxpayer to prove that a private security became wholly worthless in a particular year without an external transaction.

There is nothing inherently improper (under federal tax law) about using a bona fide sale of a low-value or illiquid investment to realize a loss, provided the transaction is genuine, properly documented, and correctly reported. Loss deductibility hinges on meeting statutory and regulatory requirements, not on whether the seller used a service provider to prepare paperwork.

Federal Tax Law Framework

There are two common federal frameworks for loss recognition relevant to “stalled” private investments.

Pathway 1: Actual Sale or Exchange (IRC §1001)

If a taxpayer sells or otherwise disposes of property, gain or loss is computed under IRC §1001(a) as the difference between amount realized and adjusted basis (as determined under IRC §1011, generally cost under IRC §1012). This framework does not require proving the asset became “wholly worthless”—it requires proving there was a genuine disposition and substantiating basis and consideration.

Pathway 2: Worthless Security (IRC §165(g))

If a “security” that is a capital asset becomes wholly worthless during the year, IRC §165(g)(1) treats the loss as from a sale or exchange on the last day of that year. The term “security” includes shares of stock in a corporation and certain rights and debt instruments (as defined in §165(g)(2) and reflected in Treas. Reg. §1.165-5(a)).

DivestMe's sale model can reduce reliance on the factual determination of worthlessness timing by creating a definitive disposition date with executed documentation—a meaningful practical advantage for tax professionals preparing substantiated returns.

Extended Refund Window for Worthless Securities (IRC §6511(d)(1))

Where a loss arises from a security that became worthless, IRC §6511(d)(1) extends the period for filing a refund claim by amended return to seven years from the due date of the return for the year of worthlessness—substantially longer than the general three-year limit under §6511(a). This is a general calendar rule; whether and how it applies to a particular taxpayer's facts is a determination for the taxpayer and their advisor.

The “Closed and Completed Transaction” Requirement

Treasury regulations and IRS guidance state that, for a loss to be deductible under IRC §165(a), it must be evidenced by closed and completed transactions, fixed by identifiable events, and sustained during the taxable year. Substance and not mere form shall govern. DivestMe's core deliverable—a counter-signed Asset Sale Agreement with Certificate of Completion, contract ID, and integrity hash, checkable against DivestMe's executed record at divest.me/verify—directly supports this concept.

Ordinary vs. Capital Loss and §1244

For most individual investors holding corporate stock as a capital asset, loss on sale or worthlessness is generally capital. An important exception is IRC §1244, which allows individuals (subject to conditions and annual limits) to treat qualifying losses on “§1244 stock” as ordinary rather than capital, up to $50,000 ($100,000 on a joint return), reported on Form 4797, Part II, line 10.

Mapping DivestMe Steps to Federal Requirements

DivestMe Step	Tax Requirement Addressed	Key Authorities
User submits asset details; DivestMe facilitates purchase for nominal amount	Proper characterization of the asset/instrument and taxpayer's ownership	§165(g) security definition; Reg. §1.165-5(a)
Seller signs the Asset Sale Agreement; DivestMe counter-signs upon payment and issues a Certificate of Completion	Loss must be bona fide and evidenced by a closed and completed transaction	Treas. Reg. §1.165-1(b), (d); substance-over-form doctrine
User pays processing/service fee before ownership transfers	Transaction costs; evidentiary chain the sale occurred in that year	Form 8949 code “E” (selling expenses); Publication 550
Permanent transfer of all rights, title, and interest	Relinquishment supports a closed and completed transaction	Reg. §1.165-1(b), (d); abandonment rules (Reg. §1.165-5(i))
DivestMe disclaims tax/legal advice; no guarantee of tax outcome	Aligns with expectation taxpayers consult advisors	DivestMe Terms; general IRS administration standards

Reporting Mechanics

Form 8949 + Schedule D

Individuals use Form 8949 to report dispositions including worthlessness of a security. Selling expenses not reflected on a statement are reported using code “E” in column (f) and a negative adjustment in column (g). Totals flow to Schedule D and net against other capital transactions.

Capital Loss Limitation

If capital losses exceed capital gains, an individual's deductible net capital loss against ordinary income is limited to $3,000 ($1,500 if married filing separately), with the remainder carried forward (IRS Topic 409).

Sample Form 8949 Entry (Illustrative)

Column	Entry
(a) Description	2,500 sh. PrivateCo (sold via DivestMe)
(b) Date acquired	06/01/2021
(c) Date sold	08/15/2025
(d) Proceeds	$1
(e) Cost basis	$25,000
(f) Code	E
(g) Adjustment	($75)
(h) Gain/(loss)	($25,074)

This example assumes a retail investor holding private corporate stock as a long-term capital asset. It is illustrative only and must be adapted to each taxpayer's facts.

Audit Risks & Common IRS Challenge Areas

Basis not substantiated

Tax law measures the loss by reference to adjusted basis. IRS guidance repeatedly emphasizes objective evidence, and basis is a core audit focus.

Disposition not legally effective

A "paper sale" that does not actually transfer rights can be challenged. DivestMe places responsibility for authority to sell and compliance with securities laws on the user.

Instrument characterization mismatches

SAFEs and convertible notes may require careful analysis to confirm they are "securities" under §165(g) or fall under other regimes (e.g., §166 for bona fide debt).

Related-party loss disallowance (IRC §267)

Losses on sales between related persons can be disallowed. Confirm there is no related-party relationship.

Wash sale disallowance (IRC §1091)

A loss can be disallowed if substantially identical securities are acquired within the 61-day statutory window.

Economic substance / business purpose (IRC §7701(o))

The codified economic substance doctrine requires a transaction to meaningfully change the taxpayer's economic position apart from tax effects and to rest on a substantial non-tax purpose. A sale relied upon for a loss must be bona fide—a genuine transfer of ownership for actual consideration—not a step undertaken solely to produce a tax benefit.

Mitigation Checklist for Tax Professionals

This checklist is designed around IRS-typical substantiation requirements: ownership, basis, transfer, year, and character.

Transaction and Ownership File

Counter-signed Asset Sale Agreement with Certificate of Completion, contract ID, and SHA-256 integrity hash (checkable against the executed record at divest.me/verify)
Proof of fee payment and any proceeds received; confirm fee’s relationship to sale for Form 8949 code “E” (selling expenses) treatment
Evidence you relinquished rights (issuer acknowledgment, updated cap table, assignment notices, ROFR waiver if needed)

Basis Substantiation

Subscription agreement + wire/ACH proof (initial purchase)
If acquired via option exercise: exercise notice, proof of exercise price paid, W-2/1099 evidence of compensation income included in basis
Track multiple lots if multiple issuances

Character Determination

Confirm whether the asset is corporate stock (likely capital asset), a §165(g) “security,” or bona fide debt
If §1244 is claimed: confirm eligibility and document it; use Form 4797 line 10

Anti-Abuse Screens

Related-party screen under §267 (no direct/indirect related party sale)
Wash sale screen under §1091 (no reacquisition of substantially identical securities in the window)

Reporting Controls

Form 8949: correct part (short- vs long-term), correct proceeds and basis; code “E” for selling expenses
Schedule D tie-out: Form 8949 totals reconcile to Schedule D
Capital loss limitation and carryforward: apply IRS Topic 409 rules

IRS Resources & Key Authorities

The IRS provides extensive public-facing guidance confirming that worthless securities (including abandoned securities) are treated as capital losses reported on Form 8949, and that Publication 550 explains the reporting mechanics for selling expenses, worthless securities, and §1244 stock.

Appendix: DivestMe Transaction Flow

For reference, below is the standard transaction workflow. DivestMe buys private, illiquid investment positions and provides documentation to help taxpayers “recognize a capital loss for tax purposes,” typically in exchange for a flat processing/service fee and a nominal purchase price.

Investor identifies an illiquid private position and collects substantiation (basis, instrument, cap table or contract)

Submits position details to DivestMe

DivestMe prepares sale/purchase documentation for nominal consideration

Investor reviews and signs the Asset Sale Agreement digitally

Investor pays DivestMe processing/service fee

DivestMe counter-signs the agreement and delivers a fully executed Asset Sale Agreement with Certificate of Completion

Investor reports disposition on return: Form 8949 / Schedule D (or Form 4797 if §1244)

Retain records for audit + timing/basis support

Accepted Instruments

DivestMe accepts several categories of private investment instruments. Acceptance means DivestMe will document a sale of the instrument; it is not a representation that any resulting loss will qualify for a deduction or for any particular tax treatment—that determination rests with the taxpayer and their advisor.

Common stock and preferred stock in private companies
Convertible notes
SAFEs (Simple Agreements for Future Equity)
LLC, LP, and fund interests (characterization of a partnership-interest sale is a matter for the holder and their advisor — see §741)
Warrants
Other illiquid private holdings with no real path to recovery

State Tax Considerations

State treatment frequently starts from (or otherwise conforms to) federal income concepts, but conformity is not uniform. States may use rolling, static, or selective conformity and may decouple from specific federal provisions. As a result, a federally recognized capital loss (or §1244 ordinary loss) may not yield the same timing/benefit on a particular state return. Taxpayers and their advisors should independently evaluate applicable state rules.