Storie Financial Advisory LLC
Gary A Storie, CFP®, EA, MS
Founder/Principal
2400 Ansys Drive
Suite 102
Canonsburg, PA 15317
724-597-2025
Fax: (724) 597-2001
gary@storiefallc.com
http://storiefinancialadvisory.com
 
 




Writing Off Worthless Securities on Your Taxes

It's a classic good news/bad news situation. If you're holding a stock that has become worthless, the bad news is obvious: you've lost your investment. The good (or at least better) news? You may qualify to deduct the investment as a loss on your tax return.

Worthless stock or bonds are those that are completely--the key word here being completely --without value. A company's filing for bankruptcy does not necessarily mean that the stock is worthless; the stock may still trade and retain at least some of its value.

The mechanics

If you own stock in a company that liquidates, you may receive at the end of the year a Form 1099-DIV, which lists the liquidating distribution made during that year. For tax purposes, you should treat this distribution as if you had sold the stock, using the distribution date on the form as the date of sale. You would subtract your cost basis from the amount of the distribution.

If you don't receive a 1099--and it's highly likely you won't--you may still be able to take a deduction for worthless stock, but the process becomes more challenging. You'll need to be able to present proof that the stock became worthless during the year in which you're deducting the loss. Examples of documents that might be considered proof include a letter from the company stating that it has shut down and there are no assets to pay shareholders, or a letter from a broker stating that the stock no longer has value. For tax purposes, worthless stock is treated as though you sold the shares on the last day of the year in which they become worthless.

Abandoning a stock

You may also be able to claim a stock as worthless if you abandoned it after March 12, 2008. To do so, you must relinquish all rights to it and receive nothing in return; however, you should consult a tax professional to ensure that the transaction is not considered a sale, exchange, contribution to capital, dividend, or gift, which could change the tax implications.

Don't ignore timing

In general, you must claim a loss on a worthless stock in the year in which it becomes worthless. (However, if you do neglect to claim the loss in the appropriate year, you can do so later by filing an amended tax return within 7 years.) IRS Publication 550 includes more information about recognizing capital gains and losses.

What if a stock is worth almost nothing?

If a stock is no longer traded but is not formally defunct, there's another (though more complicated) possibility for milking tax value from an investing mistake. You could sell the shares in an arm's length transaction (to a willing, unrelated buyer for fair value). Be sure that ownership of the shares transfers to the new owner.

You also could check with your brokerage firm to see whether it purchases virtually worthless shares from customers for a nominal amount to supply them with a trade confirmation for tax purposes.

Writing off worthless securities is far more complex than this brief discussion might suggest. Consult a tax professional to ensure you don't make any missteps.



IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. This communication is strictly intended for individuals residing in the state(s) of PA. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.