Worthless securities have a market value of zero and, along with any securities that an investor has abandoned, result in a capital loss for the owner. They can be claimed as such when filing taxes.
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.
What Are Worthless Securities?
Worthless securities can include stocks or bonds that are either publicly traded or privately held. To declare a capital loss from worthless securities, the Internal Revenue Service (IRS) suggests investors treat them as if they were capital assets sold or exchanged on the final day of the tax year. As with other securities, investors must first figure out the holding period to determine if the capital loss is short-term (one year or less) or long-term (greater than one year).
In the case of a short-term loss, investors must report this on Part I of Schedule D. Investors can net short-term gains and losses against one other to determine a net short-term gain or loss.
For long-term losses, investors report these in Part II of Schedule D. Again, investors can net long-term gains and losses against each other to determine the net long-term gain or loss. After the investor completes these calculations separately in Parts I and II of Schedule D, they can net them together for an overall result.
You may be able to use a worthless security in a tax strategy called tax selling, where an investor sells an asset with a capital loss in order to lower or eliminate the capital gain that they realize via other investments.
Understanding Worthless Securities
Public company market value, also known as market capitalization, is the number of outstanding shares of a publicly-traded company, multiplied by the current share price. For a private company, valuation methods include comparable company analysis or an estimation of discounted cash flows. Worthless securities will have a market value of zero as noted above.
For a security to become worthless, it not only needs to have no value, but it needs to have no potential to regain value. For example, a company's stock might reduce in value to zero if the market fluctuates enough. If the company has a chance to regain ground in the market, it would not be worthless stock. However, if the company closed its doors after bankruptcy, its stock would likely be worthless.
Worthless Stocks vs. Penny Stocks
Worthless stocks have a market value of zero, while penny stocks generally have market values of less than $5. However, penny stocks have the potential to become worthless securities. Because of their small market value, penny stocks typically trade outside the major market exchanges (through the OTC Markets Group and pink sheets) at a relatively low price ($5 or less). These stocks are considered highly speculative and high risk due to their lack of liquidity, large bid-ask spreads, small capitalizations, and limited followings and disclosures.
Some examples of penny stocks are:
- Wrap Technologies, Inc. (WRAP)
- LiqTech International, Inc. (LIQT)
- Smith Micro Software, Inc. (SMSI)
- Red Cat Holdings, Inc. (RCAT)
- VIA optronics AG (VIAO)
- National CineMedia, Inc. (NCMI)
How Do I Report Worthless Securities?
If you have a worthless security, you'll need to file IRS Form 8949. Make sure you have the dates you purchased it, the date you sold it, and the amount you paid and received available.
When Can You Claim a Worthless Stock?
You can claim a worthless stock in the tax year in which it becomes worthless.
How Are Worthless Securities Taxed?
They are taxed as a capital loss and can be claimed in the year the security becomes worthless.
FAQs
Worthless securities will have a market value of zero as noted above. For a security to become worthless, it not only needs to have no value, but it needs to have no potential to regain value. For example, a company's stock might reduce in value to zero if the market fluctuates enough.
What are worthless securities? ›
Worthless securities also include securities that you abandon. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Treat worthless securities as though they were capital assets sold or exchanged on the last day of the tax year.
What happens when shares are worthless? ›
When one determines for tax purposes that a security has become totally worthless, an investment fund can take a capital loss under IRC Section 165. The resulting loss may be deducted as though it were a loss from a sale or exchange on the last day of the taxable year in which it has become worthless.
How do you realize loss on worthless stock? ›
In some cases, stock you own may have become completely worthless. If so, you can claim a loss equal to your basis in the stock, which is generally what you paid for it. The stock is treated as though it had been sold on the last day of the tax year.
What to do with worthless stock options? ›
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.
What is the statute of limitations on worthless securities? ›
Period of limitations for refund claims:
7 years - For filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities, the time to make the claim is 7 years from when the return was due.
Can you sell a worthless stock? ›
Sell Worthless Stock if Your Broker Holds the Shares
And you sure don't want to pay a brokerage commission to get rid of your worthless shares. Many brokers have a plan to let their good customers sell them worthless stock for $1 or 1c for the lot. If you are a good customer, and stock is with the broker, ask.
What does "worthless" short term mean? ›
Worthless assets also include assets you abandoned, meaning that you permanently surrendered and relinquished all rights and did not receive anything in return. You must determine whether this transaction is either long-term (asset held for more than one year) or short-term (asset held for exactly one year or less).
What happens when nobody buys your shares? ›
When there are no buyers, you can't sell your shares—you'll be stuck with them until there is some buying interest from other investors. A buyer could pop in a few seconds, or it could take minutes, days, or even weeks in the case of very thinly traded stocks.
Can I claim delisted stock as a loss? ›
Technically the IRS requires that a stock be totally worthless before you are entitled to a deduction. Some delisted stocks still trade in other markets which means they're not totally worthless as the iRs requires.
If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.
How many years can you write off stock losses? ›
Any net realized loss in excess of this amount must be carried over to the following year. If you have a large net loss, such as $20,000, then it would take you seven years to deduct it all against other forms of income (a $3,000 loss every year for 6 years and a $2,000 loss in the seventh year).
At what loss should you sell a stock? ›
More Rules On When To Sell Stocks
We already covered the 8 "secrets" of selling and time-tested sell rules, including most important one — cut all losses at no more than 7%-8%. But just as several factors come into play with how to buy stocks, there is a range of rules for helping you decide when to sell stocks.
Can you exercise a worthless option? ›
Options can expire either in the money (ITM) or out of the money (OTM). Those that are in the money can be exercised while OTM options end up becoming worthless.
What tax form is worthless securities on? ›
Per IRS rules, when investment income and expenses, stocks, stock rights, and bonds became worthless during the tax year, they're treated as sold on the last day of the tax year.
Can you lose money on securities? ›
If you intend to purchase securities - such as stocks, bonds, or mutual funds - it's important that you understand before you invest that you could lose some or all of your money. Unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money you invest in securities typically is not federally insured.
Are unquoted securities bad? ›
Trading and Valuation
As a result, OTC markets that trade unquoted public companies typically have less transparency than public exchanges. Also, stocks of unquoted public companies are rarely traded, or are illiquid, leading to difficulty in pricing the stock.
