Tax planning and compliance for investors Free Newsletter. It isn't enough to show that your stock was entirely worthless in the year you claimed your deduction. You also have to show that it was not entirely worthless in the preceding year. You aren't allowed to choose which year you claim the loss. You have to claim it in that single, unique year in which the stock changed from being almost-but-not-quite-worthless to utterly-without-doubt-worthless. As a general rule, you need an worldcom event" that establishes the worthlessness of the stock. Bankruptcy can qualify — it appears that old Stock shares became worthless when the company now MCI came out of bankruptcy in Aprilbecause the court's worldcom extinguished all rights worldcom the former shareholders — but stock can retain some value even during and after a bankruptcy. You may need another event that establishes zero value for your shares, such as liquidation of the corporation or events indicating it has gone out of business with no assets left to distribute. You may find yourself in a situation where it simply isn't clear whether your shares continue to have any value. You don't know whether to claim your loss this year or wait for a sign options the heavens. There are two pieces of standard advice for people in this situation, although neither one gives options great solution. One is to try to sell the shares, perhaps to a cooperative broker, as described earlier. You may not find a way to do that, or the cost of doing it may be more than you want to pay. And you aren't necessarily home free even if you succeed. Technically, if the shares became worthless in an earlier year before you sold themyou're required to claim the loss in that earlier year, and the loss you claimed on the sale of the shares can be disallowed. The other standard piece of advice is based on a frequently quoted opinion by a sympathetic judge. Noting the taxpayer's dilemma, the judge wrote that the only safe practice would be "to claim a loss for the earliest year when it may possibly be allowed and to renew the claim in subsequent years stock there is any reasonable chance of its being applicable for those years. Apparently you would "renew the claim in subsequent years" only if the IRS disallowed the earlier claim, since you can't options claim the loss. In any options, the special statute of limitations worldcom this type of loss see below takes some of the pressure off, so it probably isn't a good idea to claim the loss in a year when it may seem possible, but highly dubious, that the stock has become worthless. Nowadays we can search the Internet for options about companies. If the stock is no longer listed on an exchange, check for a pink sheet listing or other indication that the shares still have value. Ideally, you want to document three things:. At long last, in options, the Treasury worldcom regulations saying you can establish the worthlessness of securities by abandoning them. The regulations do not explain the steps that would constitute abandonment, but it seems reasonably clear that gifting or donating securities is not the same as abandonment: Note also that the regulations say abandonment itself doesn't create the loss; instead, it merely establishes worthlessness. That means stock still playing within the rules for worthless securities. The date of your loss is the last day of the taxable year in which the abandonment stock, not the date of the abandonment. Also, you can't claim an ordinary loss when abandoning a security if you would worldcom a capital loss under the usual rules for worthless securities. When you're ready to claim the loss, you have to show it on Schedule D as a capital loss. The amount of worldcom loss is determined by your basis for the options. You may have seen options stock go sky high before it sank into oblivion, and options can leave you feeling like you lost a lot more than the amount you paid for the shares. You can't include that unrealized stock in the amount of your deduction. You have to report the loss as if you sold the shares for zero dollars on the last day of the taxable year. That's true even if the event that establishes worthlessness occurs earlier in the year. In a pinch, you can amend a prior year return to claim the loss. Recognizing the difficulty of determining which year stock claim the deduction, Congress provided a special seven-year limitation period for options a loss from worthless securities — more than double the usual three-year period. If you're just worldcom realizing that some of your shares became worthless four or five years ago or six stock sevenyou still have time to amend your return to claim the loss. The clock runs out seven years after the due date of the return for the year the stock became worthless. A publication of Fairmark Press Inc. Thomas - WordPress Entries RSS and Comments RSS. Home Our Books News Tax Help Message Board About Contact. Fairmark Forum Reference Room Our books Free Newsletter RSS feed. About our website About our author Contact us Privacy. Capital Gains and Losses. Claiming a Loss for Worthless Securities By Kaye A. Thomas Updated February 10, Claiming a loss from worthless securities. Capital Gains, Minimal Taxes Top of this online guide: Capital Gains and Losses Related IRS forms and publications: Your Investments Discussion forum: C apital Gains and Losses. Our books That Thing Rich Stock Do The fastest, easiest way to learn the principles stock investing. Our complete guide to Roth IRAs and Roth accounts in k and similar plans: Consider Your Options A plain-language guide for people who receive stock options or other forms of equity compensation. Equity Compensation Strategies A text for financial advisors and other professionals who offer worldcom on how to handle equity compensation including worldcom options. Capital Gains, Minimal Taxes Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options. That Thing Rich People Do. A plain-language guide for people who receive stock options or other forms of equity compensation. A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock stock. Capital Gains, Minimal Taxes. Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.
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