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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 claim worthless stock on taxes? ›
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? ›
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.
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.
Can you write off worthless inventory? ›
An inventory write-off is the process of removing or reducing the value of inventory that has no value for businesses from their accounting records. Inventory is written off for various reasons, such as when inventory has lost its value and cannot be sold due to damage, theft, loss, or decline in market value.
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.
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.
Can I write off a bad investment on my taxes? ›
The general rule for deducting losses on worthless investment securities is found in Sec. 165(g), which permits a loss deduction for a security that becomes worthless during the tax year, but only if the security is a capital asset in the taxpayer's hands.
How to show stock loss on taxes? ›
Report most sales and other capital transactions and calculate capital gain or loss on Form 8949, Sales and Other Dispositions of Capital Assets, then summarize capital gains and deductible capital losses on Schedule D (Form 1040).
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 happens if your stock loses all value? ›
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 deal with dead stocks? ›
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.
Is it worth writing off stock losses? ›
You must strategically deduct losses in the most tax-efficient way possible to get the maximum tax benefit in years that are characterized by significant stock losses from almost everyone's portfolios. There's at least a small comfort in knowing that these losses can help you reduce your overall income tax bill.
Are capital losses 100% deductible? ›
Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income. If you use married filing separate filing status, however, the annual net capital loss deduction limit is only $1,500.
What is the maximum capital loss for the IRS? ›
Net capital losses (the amount that total capital losses exceed total capital gains) can only be deducted up to a maximum of $3,000 in a tax year.
Can you write off stocks if you lose money? ›
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.
How to enter worthless stock in TurboTax? ›
Financial difficulties won't make a company's stock worthless unless there's no hope that the company will pull through. Enter a worthless stock like any stock sale but with a sales price of zero and the word worthless in its description. Enter the correct cost or basis, date acquired, and December 31 as the date sold.
How do I claim stocks on my taxes? ›
Whether you show a profit or a loss, you'll report stock sales on IRS Form 8949. This is the tax form used for reporting sales or exchanges of any capital assets not reported elsewhere. The information about stock sales needed on your Form 8949 should come from a Form 1099-B issued by the brokerage you're using.
What is a worthless stock on Freetaxusa? ›
What if I have worthless stock? If you had stock that became worthless in 2023, treat the worthless stock (has no value) as being sold on the last day of the year for a sales price of zero. Enter the cost basis (amount you paid) of the stock and the date it was acquired.
