Can i write off worthless stock

There is some hope that the shares could become valuable again. Several court decisions have taken more taxpayer-friendly views of this issue, but they don't establish any firm guidelines. This confusion is only made worse by the fact that shares of delisted bankrupt companies may continue to trade on the over-the-counter market via a system called the "Pink Sheets" even after it is clear that shareholders will get nothing in the bankruptcy proceedings and the shares have been legally cancelled.

While this seems to make no sense, it happens. Cancelled shares of a delisted bankrupt company may be trading for a few cents each or a fraction of a cent on the Pink Sheets market and still not qualify as worthless by some IRS auditors.

Sticklers might disallow losses until all trading in the shares has ceased. Who knows how long that might take? Taking this step has two big advantages:. For whatever reason, you might decide to hold onto distressed shares until it becomes abundantly clear that they are indeed totally worthless. The Internal Tax Code says you must claim your capital loss in the year when such total worthlessness occurs.

For the reasons explained earlier, however, it's not always clear exactly which year that is. A little-known exception in the tax law grants taxpayers a seven-year statute of limitations period — instead of the normal three years — to claim a worthless stock loss. Because Congress recognizes that determining the proper year to claim a worthless stock loss can be problematic.

So the special seven-year statute of limitations period gives you an extra four years to figure it out. As you can see, there are potential problems with claiming worthless stock losses.

Clearly, the best course of action is to sell distressed shares before they are delisted, trigger your capital loss, and move on while avoiding all the issues and hassles explained in this article. If you procrastinate and the stock becomes delisted, follow the tax filing advice above. Tags: Bankruptcy , Stocks. EHTC All rights reserved. All other logos are trademarks or registered trademarks of their respective owners. EHTC P. Normally, you must actually incur a capital loss before you can deduct it.

In other words, you must actually sell your stock for less than what you paid for it. However, if your stock becomes worthless — because the corporation that issued it dissolved, for example, the IRS still allows you to claim a loss.

Your capital loss typically equals the stock's adjusted basis minus its sale price. The adjusted basis normally equals the price you paid for the stock plus any other amounts you had to pay to purchase the stock, such as broker's fees. If you cannot sell your stock because it is worthless, the IRS allows you assign a sale price of zero and use this figure to calculate your capital loss. If you sold your stock for pennies, on the other hand, you should use the actual sale price to calculate your loss.

To calculate your capital loss, you must aggregate the total capital gains and losses that arose from your sale of investment property during the tax year. You report capital losses on Form , Form and Schedule D. Prepare documentation that proves the stock is worthless and establishes the approximate date on which it became worthless. The IRS says a stock is worthless when a taxpayer can show that the security had value at the end of the year preceding the deduction year and that an identifiable event caused a loss in the deduction year.

Just because an issuing company has filed bankruptcy does not necessarily mean its stock is worthless in that year. The company could be in reorganization, or the stock might not be worthless until a later year.

If the loss is claimed too early, the IRS will also deny it making you wait until a subsequent year when the stock actually becomes worthless. Talk to your broker before the end of the year if you have holdings that have lost all, or nearly all, of their value and you want to be able to claim your investment in them as a loss on your return.

Most brokerage firms will purchase worthless stock for a nominal amount one cent just to provide closure for their clients. This is probably the best solution for tax purposes. As a reminder, losses from sales of capital assets such as stock are first used to offset any capital gains on the return for the year of the sale. If there is still capital loss remaining, it is carried forward to the next tax year and, if necessary, to future years, until it is used up.

If you have questions related to the tax treatment of stock sales, contact the Experts at Henssler Financial:.