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How to write off worthless stock


Dear Tax Talk,
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

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Dear 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, IRS Publication 550, Investment Income and Expenses, will tell you to write off worthless stock, but it won't tell you when stock is considered worthless.

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.

-- Posted: Oct. 30, 2003




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