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A bad investment can go to near zero or close enough that it’s effectively worthless. But if you can’t sell it or it is never removed from your account (perhaps through the firm’s bankruptcy), your broker may not report that you’ve realized a loss, hampering your ability to claim a write-off and receive a tax break. But you do have ways around this and can write off worthless stock.
Here’s how to write off worthless stock and what you need to know to claim your tax break.
How to write off worthless stock so you can claim a tax break
The IRS gives everyone the ability to write off their stock losses and reduce their taxes. The process is called tax-loss harvesting, and you can use capital losses on investments such as stocks and exchange-traded funds to offset capital gains taxes. Plus, you can offset up to $3,000 each year in ordinary income, saving you even more, especially at higher tax brackets.
Normally this process is straightforward. You realize the loss by selling the investment, and your broker records the loss on its annual Form 1099-B for your account. Then you report the loss on Schedule D when tax time rolls around and you get your tax write-off.
But it can be a bit more complicated when you haven’t sold the position and realized the loss. That can happen in a few circ*mstances:
- The stock goes to zero or very close, and you’re unable to sell your position to anyone.
- The company goes bankrupt, but its stock remains in your brokerage account for some reason, and it’s unsellable.
- A long-term option may also become effectively worthless but is unsellable and won’t be removed from your account until it expires, perhaps in a subsequent tax year.
In these circ*mstances the IRS has a workaround that can help you claim your tax loss.
How to write off your investment loss
When you otherwise can’t dispose of your effectively worthless investment, the IRS allows you to abandon your investment and legally claim your loss. “To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it,” according to the agency.
Here’s what you need to do to report your loss:
- Report any worthless securities on Form 8949. You’ll need to explain to the IRS that your loss totals differ from those presented by your broker on your Form 1099-B and why.
- You need to treat securities as if they were sold or exchanged on the last day of the tax year.
- Figure your holding period based on that assumed sale date, with assets held for more than a year counting as long term and those for a year or less as short term.
You can then report the total loss on Schedule D recognizing the loss from the worthless stock. This process allows you to claim the capital loss and lets you get your tax break.
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.
FAQs
Here's what you need to do to report your loss: Report any worthless securities on Form 8949. You'll need to explain to the IRS that your loss totals differ from those presented by your broker on your Form 1099-B and why. You need to treat securities as if they were sold or exchanged on the last day of the tax year.
How to deduct worthless stock? ›
In some cases, stock you own may have become completely worthless. If so, you can claim a loss equal to your basis in the stock, which is generally what you paid for it. The stock is treated as though it had been sold on the last day of the tax year.
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.
How to get rid of worthless stock? ›
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.
What is the IRS form for worthless stocks? ›
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.
What happens when a stock is worthless? ›
Worthless securities have a market value of zero and, along with any securities that an investor has abandoned, result in a capital loss for the owner. They can be claimed as such when filing taxes.
What is 165 g 3 worthless stock deduction? ›
The general rule under IRC Section 165(g)(3) provides that if a security becomes worthless during a taxable year, the resulting loss will be treated as a sale of exchange of a capital asset, resulting in a capital loss equal to the taxpayer's basis in that asset.
How much stock loss can you write off in one year? ›
Deducting Capital Losses
If you don't have capital gains to offset the capital loss, you can use a capital loss as an offset to ordinary income, up to $3,000 per year. If you have more than $3,000, it will be carried forward to future tax years."
Why is capital loss limited to $3,000? ›
The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.
How many stock losses can you write off? ›
You can then deduct $3,000 of your losses against your income each year, although the limit is $1,500 if you're married and filing separate tax returns. If your capital losses are even greater than the $3,000 limit, you can claim the additional losses in the future.
Technically the IRS requires that a stock be totally worthless before you are entitled to a deduction. Some delisted stocks still trade in other markets which means they're not totally worthless as the iRs requires.
What is the statute of limitations on worthless securities? ›
Period of limitations for refund claims:
7 years - For filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities, the time to make the claim is 7 years from when the return was due.
Do I have to report stocks on taxes if I lost money? ›
If you experienced capital gains or losses, you must report them using Form 8949 when you file taxes. Selling an asset, even at a loss, has crucial tax implications, so the IRS requires you to report it. You'll receive information about your investments from your broker or bank on Forms 1099-B or 1099-S.
How do I deduct worthless stock on TurboTax? ›
You report the loss on Schedule D of your tax return, and list it as though it were an asset sold on the last day of the year. TurboTax easily guides you through the interview and puts your tax information on the appropriate forms so you can take this deduction.
What is section 1244 stock loss? ›
Section 1244 of the tax code allows losses from the sale of shares of small, domestic corporations to be deducted as ordinary losses instead of as capital losses up to a maximum of $50,000 for individual tax returns or $100,000 for joint returns.
What is form 8949 stock? ›
Anyone who sells or exchanges a capital asset such as stock, land, or artwork must complete Form 8949. Both short-term and long-term transactions are documented on the form. Details about the transaction must be filled in including the date of acquisition and disposition, the proceeds of the sale, and the gain or loss.
Is worthless stock a capital loss or ordinary loss? ›
I own stock that became worthless last year. Is this a bad debt? How do I report my loss? If you own securities, including stocks, and they become totally worthless, you have a capital loss but not a deduction for bad debt.
Is obsolete stock tax deductible? ›
As a business owner, you are entitled to a tax deduction for stolen or obsolete stock, as the closing value of your inventory forms part of your assessable income.
