Here’s how to sell your worthless shares of stock that have lost all of their value. If you hold shares that have become worthless, maybe because the company has ceased operations, you are probably interested in deducting the full cost basis of that position when you do your taxes. And, since you’re already in the hole, you probably want to do this without throwing any more money away. This article discusses ways you can prove to the IRS that the shares really are worthless.
The simplest and best way to close out any position, of course, is to sell it, even if you only get a dollar. But who is going to pay you even a lousy buck for worthless shares?
If you hold the share certificates, you can probably convince one of your friends or (deep breath) relatives to buy them from you for $1. (You can give back the $1, buy the proud new owner a drink, etc.) Then list the $1 as your selling price on your tax form. If your friend really wants to take official possession of the shares, he or she must send in the properly signed share certificates to the stock transfer agent, but of course if the company really is gone, the transfer agent is not going to do anything (no money, no work).
If your broker holds the shares (the shares are held “in street name”), selling them to a friend isn’t such a good deal because taking delivery of the certificates will cost you about $25 (depending on the brokerage house, of course). And you sure don’t want to pay a brokerage commission to get rid of your worthless shares. Many brokers have a plan to let their good customers sell them worthless stock for $1 or 1c for the lot. If you are a good customer, and stock is with the broker, ask. You should be able to negotiate some solution that will be satisfactory to both sides.
If for whatever reason you cannot sell the worthless shares, then you will need to obtain documentation that will convince the IRS that the stock really, truly had no value at some point in time, and close the position at that same time. This will relieve you of the burden of selling the shares. It’s very important that you can demonstrate beyond a doubt theyearthat the shares became worthless. When you do your taxes, you would write “12/31” as the date of sale and “worthless” (or 0) as the sales price. For example, if the company has delisted the shares or closed down completely, a letter from your broker or even a letter from the company might be sufficient to establish the year in which the shares became worthless.
Interestingly, if you had shares that became worthless, and you declared them worthless, took the loss, yet hung on to the shares, you’re OK if they later regain value. The IRS now anticipates that a stock you kept while declaring it to be worthless later rises from the dead. In that case, no need to amend, but use the worthless date as the acquisition date and 0 as the cost basis. So in this regard they are pretty lenient.
Note that if a company’s stock goes worthless, you should declare this event in the year it becomes worthless. If you have to file an amended return (1040X) later, you have 7 years to do so, unlike 3 years for most other 1040X filings.
As you can see, it’s far simpler to sell the shares for a pittance than to demonstrate that they are worthless, so that’s probably the way to go if you can manage it. Although this does not establish the year in which the shares became worthless, it does give you a clear sale at a very low price, and that’s always simple to explain.
Is a Bankrupt Company’s Stock Worthless?
One last caveat. Don’t confuse a bankrupt company with a completely defunct company. Many companies continue operating while in bankruptcy proceedings, and their stock continues to trade. So the stock by definition is not worthless. In the newspaper listings, the prefix ‘vj’ is often used to indicate such companies.
For example, when this article was first drafted, vjRAYtc (Raytech) closed at 4/38. However, a bankrupt company does not always have a low share price. About 25 years ago John Manville Co. was hit with asbestos lawsuits, and filed for bankruptcy to protect them against these suits. Except for the potential liabilities of the law suits, they had an enormously healthy balance sheet and their stock continued to trade high. More recently, about 1991 Columbia Gas of Ohio filed for bankruptcy to get out of some unfortunate long-term contracts they had written for natural gas purchases. Their stock continued to trade, generally in the $30 range, until they finally emerged with a favorable court ruling.
Article Credits:
Contributed-By: Art Kamlet, Chris Lott
FAQs
Sell Worthless Stock if Your Broker Holds the Shares
What happens if your shares become worthless? ›
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values. The New York Stock exchange (NYSE), for instance, will remove stocks if the share price remains below one dollar for 30 consecutive days.
How is worthless stock treated? ›
Worthless securities also include securities that you abandon. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Treat worthless securities as though they were capital assets sold or exchanged on the last day of the tax year.
When should you sell a poorly performing stock? ›
When To Sell And Take A Loss. According to IBD founder William O'Neil's rule in "How to Make Money in Stocks," you should sell a stock when you are down 7% or 8% from your purchase price, no exceptions.
How do you recover from a bad stock investment? ›
If tough market conditions in the past have left you with cold feet, consider this six-point plan to help you start trading again.
- Learn from your mistakes. ...
- Keep a trade log. ...
- Write it off. ...
- Slowly start to rebuild. ...
- Scale up and scale down. ...
- Use limit and stop orders.
Sell Worthless Stock if You Hold the Share Certificates
If you hold the share certificates, you can probably convince one of your friends or (deep breath) relatives to buy them from you for $1. (You can give back the $1, buy the proud new owner a drink, etc.) Then list the $1 as your selling price on your tax form.
What to do with worthless stock options? ›
Bottom line. If you have a worthless asset, you can claim your tax write-off and reduce your taxable income. But it's important that you follow the IRS procedures, because your brokerage may not report your loss on worthless securities that remain in your account if you can't dispose of them.
What is the statute of limitations on worthless stocks? ›
Statute of limitations for deduction of a bad debt or worthless securities is 7 years.
How do I report a stock that is worthless? ›
Per IRS rules, when investment income and expenses, stocks, stock rights, and bonds became worthless during the tax year, they're treated as sold on the last day of the tax year. screen if you're entering a consolidated broker statement.
What happens when a stock is worth nothing? ›
What happens when a stock hits 0? Most likely, they just stop being publicly traded and convert back to a private company. They may file for bankruptcy, though they don't have to. But if they wish to continue doing business, they need to find new investors.
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What is the 7 percent sell rule? ›
The 7% stop loss applies to any stock purchase at any level. If you bought a stock at 45 and the buy point was at 43, you want to calculate the 7% sell rule from your purchase price.
What is the wash sale rule? ›
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
How do I get my money back from a bad investment? ›
Legitimate Avenues for Recovery of Investment Losses
- Arbitration or Mediation. ...
- Restitution from SEC and FINRA Enforcement Actions. ...
- Fair Funds and Disgorgement Plans. ...
- SIPC Protections.
How do I get rid of dead stock? In offloading dead stock, some options are more profitable than others. There are a few ways to get rid of dead stock, such as bundling a dead stock item with a high-demand product for free, returning it to the manufacturer or supplier, or donating it to a non-profit organization.
How do you make money on a failing stock? ›
Short selling is a strategy for making money on stocks falling in price, also called “going short” or “shorting.” This is an advanced strategy only experienced investors and traders should try. An investor borrows a stock, sells it, and then buys the stock back to return it to the lender.
Do I lose my money if a stock is delisted? ›
Though delisting does not affect your ownership, shares may not hold any value post-delisting. Thus, if any of the stocks that you own get delisted, it is better to sell your shares. You can either exit the market or sell it to the company when it announces buyback.
Do I owe money if stock goes negative? ›
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
Can you write off 100% of stock losses? ›
If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.
What happens if a share value becomes zero? ›
If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders. “A company typically goes to zero when it becomes bankrupt or is technically insolvent, such as Silicon Valley Bank,” says Darren Sissons, partner and portfolio manager at Campbell, Lee & Ross.
Here’s how to sell your worthless shares of stock that have lost all of their value. If you hold shares that have become worthless, maybe because the company has ceased operations, you are probably interested in deducting the full cost basis of that position when you do your taxes. And, since you’re already in the hole, you probably want to do this without throwing any more money away. This article discusses ways you can prove to the IRS that the shares really are worthless.