Although it may not seem so in volatile markets, investing in stocks is a sound, long-term way to build wealth. It also offers some tax advantages.
In the best scenario, your holdings appreciate and you sell them for a nice, and lower-taxed, capital gain. Even when a few assets don’t do as well, you always have the silver lining of being able to use those losses to offset your taxable gains.
But what if your shares of a corporation dropped off the stock market radar before you were able to unload them? You might be able to write off the holding on your tax return as a worthless stock.
More On Taxes and Investments:
Worthless means zero value
Before you can use this tax break, the stock must be totally worthless.
Just because a company is in bankruptcy, or its stock isn’t trading, doesn’t necessarily mean it’s worthless. If it’s worth even a few pennies, it still has value in the eyes of the IRS.
If you truly do have a dead stock in your portfolio, you treat it on your tax return as if it were a capital asset you sold for zero dollars on the last day of the tax year.
Documentation for the IRS
When you report a worthless-stock transaction, you don’t have to put the details of the stock’s demise on your return.
However, tax experts say if you’re questioned by the IRS, you need to be prepared to show:
- There is no hope investors will ever get anything for their holdings. This isn’t always easy, so do your homework.
- When the security became worthless. You must reasonably determine the date the stock lost all its value.
Once you’re armed with that information, it’s time to report your loss.
Filling out the form
Report the valueless stock in eitherPart I orPart II of Form 8949, depending on whether it was a short-term or long-term holding. If an asset became worthless during the tax year, it is treated as though it were sold on the last day of the year. That could affect whether your capital loss is a short- or long-term one.
Your worthless stock losses, either short-term or long-term, can offset capital gains dollar for dollar. If you have more in capital losses than gains, then your loss can offset ordinary income up to $3,000. Additional losses can be carried forward to future tax years.
If you discover you didn’t claim a valueless stock loss on your original tax return in the year it became worthless, you can file a claim for a credit or refund due to the loss. Just file Form 1040X to amend your return for that year.
You have up to seven years from the date your original return had to be filed or two years from the date you paid the tax, whichever is later.
For additional information, check out Chapter 4 of IRS Publication 550, Investment Income and Expenses.
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.
Can I write off 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.
How to get rid of worthless stock? ›
Sell Worthless Stock if Your Broker Holds the Shares
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.
How do you report worthless stocks? ›
If you have a worthless security, you'll need to file IRS Form 8949.
Can you write off a lost stock? ›
Realized capital losses from stocks can be used to reduce your tax bill. You can use capital losses to offset capital gains during a tax year, allowing you to remove some income from your tax return.
What happens to worthless stocks? ›
What Happens If a Stock Price Goes to Zero? If a stock's price falls all the way to zero, shareholders end up with worthless holdings. Once a stock falls below a certain threshold, stock exchanges will delist those 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 do you write off delisted shares? ›
The delisting of shares results in the impossible selling of shares until the company goes through the exit route. It is effectively irrecoverable and is a loss to the taxpayer. Once the company goes through liquidation or is referred to NCLT under IBC, NCLT declares the company to drop the shares and claim the loss.
How do I report worthless stock on Turbotax? ›
First off, be sure it is deemed worthless. Then, Report the valueless stock in either Part I or Part II of Form 8949, depending on whether it was a short-term or long-term holding. If an asset became worthless during the tax year, it is treated as though it were sold on the last day of the year.
What does "worthless" mean on 1099-B? ›
Worthless securities will have a market value of zero. Worthless securities are stocks, stock rights, and bonds that became completely worthless during the tax year. Although penny stocks have comparatively little market value, they are not considered worthless.
You can claim the loss in future years or use it to offset future gains, and the losses do not expire. You can reduce any amount of taxable capital gains as long as you have gross losses to offset them.
How much stock loss can you write off in a year? ›
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.
What is the 30 day loss 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.
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.
Can you write-off a bad investment in an LLC? ›
FAQs on LLC Losses and Deductions
Yes. Your LLC losses pass through to your personal income tax where you can write off the loss. This scenario would apply if you have a job where you get a W-2 as well as a business on the side.
