Tax Strategies & Credits

How to Write Off Worthless Stock

How to Write Off Worthless Stock

Picture this: you make an investment in a company you think will be growing explosively for years to come, only to watch their stock price completely tank after you invest. 

If there’s anything worse than losing money on a stock, it’s losing money on a stock and then not being able to take the loss as a write-off. Unfortunately, if you don’t know the correct way to handle the situation, that’s exactly what could happen.

Writing Off Your Stocks the Right Way

Whether you’ve simply picked the wrong asset and it’s lost value rather than gained, or the issuing company has actually gone out of business, you can’t claim a loss on a stock, bond, stock rights, debentures, or similar debt instruments until you’ve actually sold it. 

And, under “wash-sale rules,” if you sell stock for a loss but buy it back within 30 days before or after the loss-sale date, “the loss cannot be immediately claimed for tax purposes.”

For assets that you have not sold but that you believe have lost all value, the process is not as straightforward. You can’t just point to a bankruptcy and report a loss — the IRS will rightly counter that the company could be reorganizing. There are certainly plenty of companies that have filed for bankruptcy, seen their stocks tumble, and then made a great recovery.

To prove that a stock has lost all value, its owner needs to be able to both point to an identifiable event that occurred in the tax year that they want to take the loss, and also show that the stock’s value was greater the year before. But on top of that, it’s also important that you do so in a timely way. If you make the decision to hold off for a year or two to see if a stock bounces back, you run the risk of the IRS challenging you based on the stock losing its value before the year that you end up filing. If that happens you will lose your opportunity to take the loss, and could also lose your opportunity to amend an earlier tax return if more than three years have gone by. Similarly, if you make the argument that the stock is worthless too early, you’re going to have to hold on to it for at least another year if you want to take the loss. 

If you own a security that you feel is worthless (or close to it) and you want to claim it as a loss this year, doing so can help you offset any capital gains reported on the same return.  Your broker can help by buying it from you for a penny or two. That will allow you to point to a current-year sale date to confirm a loss, thus avoiding the question entirely. Most firms are willing to do this for their clients. If your losses exceed your gains you can use up to $3,000 ($1,500 if married filing separately) to offset other types of income and then carry over up to the same amount year after year until the loss amount has been exhausted.

No investor wants to see the value of their stock plummet to essentially zero, but if this does happen, you have write-off options. If you have any questions about the proper way to write off your worthless stocks, contact a tax professional today.

Gordon W. McNamee, CPA writes for TaxBuzz, a tax news and advice website. Reach him and his team at [email protected].

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

GORDON W. MCNAMEE, CPA
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