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Tax Implications of Worthless Stock

Posted by Andrew Chan  February 10, 2012 09:00 AM

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What are the tax implications of owning stock that has become worthless and can I deduct it on my tax return?

The rules for deducting worthless stock can be complicated. In order for a stock to be considered worthless, it must have no market value. This usually occurs when a company ceases its operations or liquidates its assets. Keep in mind that bankruptcy is not necessarily an indicator of whether or not a stock is worthless because the company’s stock may still be trading or the company may still be operating while in bankruptcy.

For tax purposes, here are some of the main things to consider when dealing with worthless stock:

* Stocks that are considered worthless are deemed to have been sold on Dec 31 of the year in which it became worthless. This “sale” creates a short-term or long-term capital loss based on how long you have held the stock. The loss should be included in Schedule D of Form 1040 and treated like other capital gains and losses from the sale of securities in your portfolio for that year.

* A deduction for worthless stock needs to be taken in the year in which the stock becomes worthless. If the stock is deemed worthless in a year in which you already filed your tax return, you will need to amend your return for that year. Taxpayers have up to seven years to amend their tax returns to claim this deduction.

* If you take a loss deduction for worthless stock you need to prove to the IRS that the stock is really worthless. Obtaining documentation about when and if a stock is worthless can be difficult. However, the IRS generally accepts a 1099-DIV from the company or a letter from your broker that the company has been delisted and that the stock no longer has any value. If you do not receive any documentation from the company or your broker you may be able to hire a stock-tracing company to research the values for you and provide you with the necessary documentation.

Due to the complexity of these rules, it may make sense to consult with a tax professional if you have a substantial amount of holdings that you believe are worthless.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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