How To Write Off Worthless Stock And Get A Tax Break | Bankrate (2024)

Our writers and editors used an in-house natural language generation platform to assist with portions of this article, allowing them to focus on adding information that is uniquely helpful. The article was reviewed, fact-checked and edited by our editorial staff prior to publication.

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.

How To Write Off Worthless Stock And Get A Tax Break | Bankrate (2024)

FAQs

How To Write Off Worthless Stock And Get A Tax Break | Bankrate? ›

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 write off stock that is worthless? ›

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 enter worthless stock on tax return? ›

Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. See Form 8949 and the Instructions for Form 8949. Filing a claim for refund.

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.

How to report worthless stock on tax return 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.

How much stock market losses can you write-off? ›

No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).

Can you claim a tax loss on worthless stock? ›

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.

Is it worth claiming stock losses on taxes? ›

Key Takeaways

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 write off stock losses 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.

When to Report worthless stock? ›

When one determines for tax purposes that a security has become totally worthless, an investment fund can take a capital loss under IRC Section 165. The resulting loss may be deducted as though it were a loss from a sale or exchange on the last day of the taxable year in which it has become worthless.

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.

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.

Can you write off delisted stock? ›

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.

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.

What is the statute of limitations on worthless securities? ›

Statute of limitations

If you're just now realizing that some of your shares became worthless four or five years ago (or six or seven), you still have time to amend your return to claim the loss. The clock runs out seven years after the due date of the return for the year the stock became worthless.

Can you write-off delisted stock? ›

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.

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.

Top Articles
Latest Posts
Article information

Author: Clemencia Bogisich Ret

Last Updated:

Views: 5665

Rating: 5 / 5 (60 voted)

Reviews: 91% of readers found this page helpful

Author information

Name: Clemencia Bogisich Ret

Birthday: 2001-07-17

Address: Suite 794 53887 Geri Spring, West Cristentown, KY 54855

Phone: +5934435460663

Job: Central Hospitality Director

Hobby: Yoga, Electronics, Rafting, Lockpicking, Inline skating, Puzzles, scrapbook

Introduction: My name is Clemencia Bogisich Ret, I am a super, outstanding, graceful, friendly, vast, comfortable, agreeable person who loves writing and wants to share my knowledge and understanding with you.