to write off worthless stock
Over the past couple of years, I have watched
several of my stocks become worthless. I have not received a 1099
showing liquidation, but they aren't traded on the exchange. My
research indicates that I can't write them off my taxes without
the 1099 showing liquidation, though I can sell the worthless stock
to an individual and then write the losses off. How do I do this
and get the proper paperwork for the sale? How much can I write
off each year? -- Phillip
You're not alone in watching hard-earned money evaporate. If your
investment had turned into profits, your tax rate would be a favorable
15 percent. But when investments turn into losses, they're only
worth a pittance as a deduction.
Losses from investments are treated as capital losses
on Schedule D of your form 1040. An overall capital loss for the
year is limited to a deduction of $3,000 against other income, such
as salaries, interest and pensions. Any unused loss can be carried
over to succeeding years and can fully offset gains in those years.
However, any excess of loss in a succeeding year can only be deducted
up to $3,000.
While you usually have to wait until you sell a stock
to recognize a loss (in which case it would be shown on a 1099),
this is not the case with worthless stocks. A stock that becomes
worthless during the year is treated as if it were sold on the last
day of the tax year (i.e., Dec. 31). Exactly when a stock becomes
worthless is the subject of much debate in the tax law. In fact,
Publication 550, Investment Income and Expenses, will tell you
to write off worthless stock, but it won't tell you when stock is
If your stock is no longer traded, then it's probably
a safe bet to claim a write-off during the year that trading ceased.
If it would cost you more to sell the stock than it is worth, then
it's also safe to assume that you can claim a write-off.
Since most stock is held in street name with your
broker, it would be difficult to sell it to another individual.