Turning Your Worthless Stock Into A Tax Deduction
Own stock in a company that went bankrupt this year? You are not alone. Fortunately, you may be able to take a income tax deduction on that worthless stock.
Good year or bad, there are always going to be a number of publicly traded companies that crash and burn in a given year. Remember, Enron was a disaster in the middle of one of the strongest economic environments in years. Of course, there has been more bad news than good since then, so failing companies have become a bit of the norm.
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How does the IRS view stock in a failed company? Well, it is seemingly simple, but a bit technical when looked at closely. Generally speaking, the IRS takes the position that completely worthless stock should be treated as though it was sold on the last calendar day of the year in question. The question, of course, is what does “completely” mean? The answer is a totally worthless stock. This means one that is no longer traded anywhere. Many taxpayers get into trouble by claiming this deduction when a stock is delisted. A delisted stock may not be on NASDAQ or NYSE anymore, but it could still be trading on the pink sheets or warrant markets. If so, it is not completely worthless.
To claim the deduction, you’ll need to get Schedule D for the 1040 tax form for the year in question. The entry is made in lines 1 or 8 depending on whether the stock was held short term or long term. Keep in mind, the date used to determine this is the last day of the calendar year in question as mentioned above, not the day the stock actually became worthless. Regardless, pick the appropriate line and then write in the word “worthless.”
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What if you’ve had worthless stock in the past, but didn’t claim it for whatever reason? Well, you can go back and amend the tax return for the year in question. This, however, is capped with a three year look back rule. Put another way, you can’t try to amend your 1999 tax return to get a refund on worthless stock from that year!
They say you should look for the silver lining in storm clouds. If you find yourself stuck with worthless stock, the silver lining is you can at least claim a tax deduction.