When is stock worthless for tax deduction

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations.

Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations.

As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.

These include:. Income Tax. Investing Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Investing Stocks. What Are Worthless Securities? Key Takeaways Worthless securities are stocks, bonds, or other holdings that have no market value; they can be publicly-traded or held privately.

The IRS recommends investors account for worthless securities as if they were capital assets that had been dumped or exchanged on the last day of the tax year.

As such, these securities can be claimed as a capital loss when the investor files their taxes; the holding period determines whether the loss is short-term or long-term. Penny stocks have comparatively little market value but are not considered worthless, though they have the potential to become just that.

If the IRS later denies the deduction for the later year at a time when it is too late to amend the return for the earlier year, the opportunity to claim the deduction may be lost. Consequently, it is often prudent to claim the deduction for the year in which the stock first becomes worthless. The timing rules for worthless stock deductions are different, however, for stock held within a group of corporations that file consolidated federal income tax returns a consolidated group.

Instead, another triggering event—such as the subsidiary disposing of all of its assets or exiting the consolidated group—must occur. The taxpayer in the CCA was a consolidated group.

The value of Sub later declined—the taxpayer considered Sub to have negative net worth by the end of Year 3. In Year 6, Sub was deemed to liquidate because taxpayer filed a check-the-box election to treat Sub as a disregarded entity rather than as a corporation for tax purposes.

Taxpayer claimed a worthless stock deduction for Year 6. The IRS concluded that the worthless stock deduction was not available until Year 6, the year for which the taxpayer had claimed it. Although the Sub stock became worthless in Year 3, the special rules governing worthless stock deductions required an additional triggering event before the taxpayer could claim the worthless stock deduction.

The first triggering event to occur was in Year 6, when Sub ceased to be a member of the consolidated group as a result of its deemed liquidation.

Sub had reduced the scope of its business in Years 2 and 3 but continued to operate its remaining business. Sub therefore did not trigger the worthless stock loss by disposing of all of its assets.