Christopher MarkowskiArticle, Financial PlanningLeave a Comment

After the aftermath of the past two years (Lehman, Wachovia, GM and Washington Mutual) a question and problem we have to deal with from many of our new clients coming on board is, “What do I do with stock that is worth zero?”

The strategy is to claim a capital loss deduction for worthless stock on Schedule D on the return. The loss can offset capital gains plus up to $3000 of high-taxed ordinary income. A worthless stock is treated as it had been sold on the last day of the tax year in which it becomes worthless. Thus, the resulting loss is either short-term or long-term (stock held for longer than one year).

If it can’t be determined that the stock has become worthless until a subsequent year, the taxpayer may file an amended return for the year it actually became worthless. There is a three year period to file an amended return. This period is extended to seven for losses related to worthless stock. Because this determination is often difficult to make, clients should claim the loss in the earliest year it’s reasonable. If a client currently owns stock that is on the verge of becoming worthless, he or she can sell it now to realize a loss without having to show that the securities have become worthless.

Secure Loss Deductions for Worthless Stock TaxStrategist February 2009

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