What do I do with my worthless stock?

“I have stock that I bought in 2000 during the tech craze. It’s sitting in my brokerage account and has no value. I don’t think I can sell it, so can I write it off?”

It’s tough to make an investment in a company you think has great potential, only to watch the stock go to zero. Worse yet is being reminded of it every month on your brokerage statement. If you’re not willing to wait around for the company to turn around, you can get rid of your “near-worthless” stock.

First, let’s differentiate between worthless stock and near-worthless stock. Stock becomes worthless when the company enters bankruptcy and no shareholder equity remains, or the company is liquidated. In that case you have a clearly identifiable event proving the stock has no value. You must write off worthless stock in the year it becomes worthless. If you wait until a future year to put it on your tax return the IRS can disallow the sale. Fortunately the IRS gives you 7 years to amend returns for the purpose of claiming a worthless stock.

You may have near-worthless stock if the company still exists, but there is no bid for the stock. It can take a long time for a company that is virtually worthless to go through bankruptcy. If you don’t want to wait for that to happen, you can do a tax-loss sale to get rid of your shares. First you must attempt to sell the stock in the open market. Speculators may be willing to buy your shares for pennies through the OTC Bulletin Board system. If there are no bids for the stock your broker or custodian will usually take the stock off your account for $1 or less (for the total position).

There are a few restrictions: mutual funds are not eligible for tax-loss sales, nor are positions held in tax-deferred accounts. You must sell the entire position. In addition the sale is irrevocable. Losses in minors’ accounts (UTMA or UGMA accounts) must be claimed on the minor’s tax return. If they have little or no income or capital gains the loss won’t result in much or any tax benefit. It’s always wise to consult with a tax professional before making a tax-loss sale.