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A bad investment can be close to zero or so close to being effectively worthless. But if you can’t sell it or if it’s never removed from your account (perhaps because of the company’s bankruptcy), your broker may not report that you suffered a loss, affecting your ability to claim a write-off and tax receiving is hindered. pause. But you can get around this and write off worthless shares.
Here’s how to write off worthless shares and what you need to know to claim your tax benefits.
How to write off worthless shares so you can claim a tax benefit
The IRS gives everyone the opportunity to write off their stock losses and reduce their taxes. The process is called tax loss harvesting, and you can use capital losses on investments such as stocks and exchange-traded funds to offset capital gains taxes. Plus, you can offset up to $3,000 in ordinary income each year, saving even more, especially at higher tax brackets.
Normally this process is simple. You realize the loss by selling the investment, and your broker records the loss on its annual Form 1099-B for your account. Then you report the loss on Schedule D when tax time comes and get your tax write-off.
But it can be a little more complicated if you didn’t sell the position and realize the loss. This can happen under a number of circumstances:
- The stock price goes to zero or is very close to it, and you cannot sell your position to anyone.
- The company goes bankrupt, but the shares remain in your investment account for some reason and are unsellable.
- A long-term option may also become effectively worthless, but it will be unsellable and will not be removed from your account until it expires, perhaps in a subsequent tax year.
In these circumstances, the IRS has a solution that can help you claim your tax loss.
How to write off your investment losses
If you otherwise cannot dispose of your effectively worthless investment, the IRS allows you to cancel your investment and legally claim your loss. “To surrender a security, you must permanently surrender and relinquish all rights to the security, without receiving any consideration in return,” the agency said.
This is what you need to do to report your loss:
- Report worthless effects on Form 8949. You must explain to the IRS that your loss totals differ from the amounts your broker reported on your Form 1099-B, and why.
- You must treat securities as if they were sold or exchanged on the last day of the tax year.
- Calculate your holding period based on that assumed sale date, with assets held for more than a year as long-term and those held for a year or less as short-term.
You can then report the total loss on Schedule D, recognizing the loss of the worthless shares. This process allows you to claim the capital loss and get your tax benefit.
In short
If you have a worthless asset, you can claim your tax write-off and reduce your taxable income. But it’s important that you follow IRS procedures because your brokerage may not report your loss on worthless securities left in your account if you don’t have access to them.
