How To Write Off Worthless Stock

If you are like most investors, eventually you will pick a loser stock that goes down in value. Sometimes, a security can even become worthless when the issuing company goes out of business.

Gains and losses for securities, including stock, stock rights, bonds, debentures, and similar debt instruments, are not recognized for tax purposes until the securities are sold or become worthless. If the security is sold for a loss, the date of loss is easily determined since it is the sale date. However, for worthless stocks, it is not that easy to determine the date of loss. And taxpayers cannot just pick the year they want to, for claiming the loss.

Definition of worthless stock

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 reorganizing, or the stock might not be worthless until a later year.

Here’s what you can do about it

Whatever you do, don’t wait until it’s too late to take your loss. If the IRS challenges the loss and the security is found to have become worthless in an earlier year, the current year’s loss will be denied. The only thing that can be done at that point is to amend your prior year’s return to claim your loss. However, that only possible if the three-year statute of limitation has not expired. If you claim a loss too early, the IRS will also deny it. In this case, you would have to wait until a later year – when the stock actually becomes worthless.

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 2019 return, talk to your broker before the end of the year. Most brokerage firms will purchase worthless stock for a nominal amount (one cent) just to provide closure for their clients. This is the best solution for tax purposes. The sale will appear on Form 1099-B issued by the broker, and there will be no debate with the IRS over when the stock became worthless.

Summary

To sum up, 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 the amount of the gain isn’t enough to absorb all of the losses, up to $3,000 ($1,500 if married filing separate) can be used to offset other types of income. 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, please give Scott Nissen a call at (360) 778-2901.

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