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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 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.
Can you write off 100% of stock losses? ›
If your net losses in your taxable investment accounts exceed your net gains for the year, you will have no reportable income from your security sales. You may then write off up to $3,000 worth of net losses against other forms of income such as wages or taxable dividends and interest for the year.
What is the IRS form for worthless stocks? ›
Per IRS rules, when investment income and expenses, stocks, stock rights, and bonds became worthless during the tax year, they're treated as sold on the last day of the tax year.
Do you get a tax break for losing money on stocks? ›
The IRS allows you to deduct from your taxable income a capital loss, for example, from a stock or other investment that has lost money. Here are the ground rules: An investment loss has to be realized. In other words, you need to have sold your stock to claim a deduction.
How do you take tax losses on worthless stocks? ›
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 do I deduct worthless stock on TurboTax? ›
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.
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 is the 165 g worthless stock deduction? ›
§165(g), Worthless Securities
If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset.
Why are capital losses 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.
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 decrease federal income tax? ›
- Invest in municipal bonds.
- Shoot for long-term capital gains.
- Start a business.
- Max out retirement accounts and employee benefits.
- Use a health savings account.
- Claim tax credits.
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.
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 you clear dead stocks? ›
Resurrect the value of your dead stock and make room for new inventory using the following best practices.
- Put dead items on sale. ...
- Offer them as a free gift. ...
- Donate them. ...
- Offer product bundles. ...
- Try to return them to supplier. ...
- Build brand partnerships. ...
- Open new sales channels.
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 I get rid of old stocks? ›
One of the best ways to get rid of excess inventory is holding sales and discounting items. This tactic is most suited when trying to drum up demand for products that may be outdated or out of season. Businesses can use flash sales strategies alongside this to try and create a sense of urgency around the offer.
