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Posted by: Charles P Myrick CPA Posted on: Nov 03 2014 Posted in: tax planning and preparation, bookkeeping services

How to Take a Tax Loss for Worthless Stock

In the last few years, have you purchased stock in a dot-com that's now out of business?  Do you hold other shares that are now worth only pennies?  In some cases, you may be able to take a tax loss for a worthless security. Here's a quick look at the tax planning rules:

Is it worthless?

The stock must be completely worthless before you can claim a loss.

For example, if it's a publicly traded company and the share price is worth one penny, it still doesn't qualify as worthless. (If this is the case, you may be better off selling it to your broker for a penny and taking a regular capital loss.)

What event caused it to be worthless?

You must be able to identify an event that caused it to become worthless and a date for that event.

For example, even if the company declares bankruptcy, the stock may not be worthless if there's a chance it will reorganize and emerge from bankruptcy. But if it becomes clear at a bankruptcy hearing that the creditors will own the reorganized company, you can consider your stock worthless at that time.

When can you claim a tax loss?

You must claim a worthless security's loss in the tax year it became worthless. In order to recoup  tax savings verified in later years, the IRS allows you to go back seven years to file an amended return claiming the loss. 

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These are general rules and it is often a judgment call to decide that a stock is worthless.  To learn more about claiming a tax loss for your worthless stock, get in touch with Washington DC tax preparation firm,  Charles P Myrick CPA.