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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 circumstances:
- 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 circumstances 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.
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