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Tax Strategies & Credits

Have a Worthless Stock You Want to Write Off for 2016?

by
Sonu Shukla
on
11/13/2016
Have a Worthless Stock You Want to Write Off for 2016?

If you are invested in the stock market, you probably do your research, make careful selections and hope for the best – and unfortunately the best is not always what happens. If you are looking at your portfolio and seeing holdings where the company you’ve invested in has dissolved – there are things you need to do and steps you need to take. 

Taxes and Securities’ Gains and Losses

Writing off a loss on a security is something that can only be done when it either becomes worthless or when the taxpayer sells the stock. In the latter case, the loss is calculated by looking at the value on the date that the security is sold, but calculating the loss on a stock whose value has dropped to nothing is more of a challenge, and is guided by a number of guidelines and rules imposed by the Internal Revenue Service.

Proving That a Stock is Worthless

Though taxpayers may believe that a stock no longer has value as soon as the issuing company declares bankruptcy, the IRS rules require a complex series of proofs, including being able to show that the stock had worth at the end of the preceding year as well as being able to point to a specific event that led to that value dropping to nothing.  This is because there are numerous things that could cause a temporary drop in value, including a drop from which it can recover or being in the midst of a reorganization. 

Beware of Delay

There is a narrow path to the ability to write off the loss of a worthless stock, as you are not able to take it before you can prove the above points, but also can’t wait so long as to allow another tax year to go by. Doing so would jeopardize your ability to take the loss in the current year, though you would be able to submit an amended return for the tax year that would have been appropriate for claiming the loss on the security. Even this possibility will vanish after the three year statute of limitations is up.  

Seek Guidance

The best thing to do if you have a security that you believe has lost all of its value is to talk to your financial advisor to determine your eligibility for filing for a loss on your taxes.  In many cases, if a stock is worthless the brokerage will offer you the convenience of buying stocks that are worthless for a few pennies in order to provide you with the ability to sell it at a loss on that year’s tax return.  This is an elegant solution that prevents you from having to wait another year or provide proof of a specific event that rendered the stock worthless, and allows you to simply submit a 1099-B that your brokerage will issue along with all of the other appropriate end-of-year tax forms.

Understanding the Write-Off

It is important to remember that you don’t just get a straight write-off on losses resulting from a worthless stock or a sale that resulted in a loss. The loss is used as an offset on any gains that you may have realized during the same year. Also there are limits to how much you are able to take in a loss in a single year, so after you balance your gains, you are then only allowed $3,000 in losses. Anything beyond that is carried over into the next tax year, and this goes on until you have exhausted the loss – and if you are married filing separately that threshold is cut off at $1,500 in losses for the year.

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Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

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