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-- Posted: Sept. 7, 2000

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

What is a 'worthless' security?

Dear Dollar Diva,
I owned 100 shares of stock in a company that went into bankruptcy. It had a reverse split of 100-to-one, and I now own one share of stock worth 33 cents. How do I get rid of one share so I can claim a loss?

-- John


The question is, can you write the stock off as "worthless," or do you have to sell it to take the loss? The IRS considers a security "worthless" when it has no current liquidation value, and no expectation of ever being worth anything in the future. There is no formula for determining when a security's value becomes zilch; each case is judged by its particular facts and circumstances.

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If the company went belly up, and you are sure you will not receive a penny in liquidation, you should be able to write your stock off as "worthless." If the stock actually has a trading value, i.e. you could get 33 cents for it, you have to sell it in order to take the capital loss.

If your stock is "worthless," claim the loss on Schedule D, Capital Gains and Losses, of your Form 1040 Individual Income Tax Return. Report the date you acquired the stock and what you paid for it on the appropriate lines, and report "worthless" on the lines asking for the "date sold" and "sales price." For purposes of determining if the loss should be claimed as short-term (held one year or less) or long-term (held more than one year), the IRS will treat the stock as if it were sold on the last day of the year it became worthless.

Remember, the maximum capital loss a taxpayer can deduct each year is $3,000. If your loss is more, the balance will get carried forward to future years.

For more information on "worthless" securities, read IRS Publication 550, Investment income and expenses (including capital gains and losses).

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