If your portfolio holds some securities that are “worthless,” you may be eligible for a tax deduction. There are special rules relating to worthless securities—one very important caveat is that a “worthless” security must have no value. A stock may plummet in value but still not be worthless.
A security becomes totally worthless when it has no value or no potential value. Evidence of worthlessness must clearly indicate no probability of realizing anything of value for the security from a sale, liquidation or otherwise. However, these events do not conclusively establish worthlessness if other facts indicate that the security still has value.
For example, the cessation of business and sale of all assets may not establish that securities are worthless if there is some reasonable prospect that the shareholder will recover some money in litigation.
Taxpayers may believe that because a company declared bankruptcy, their shares are worthless. However, stocks of companies in bankruptcy oftentimes have some value, and thus, are not worthless. Moreover, the stock may have potential value if there is a reasonable expectation that the issuer will be profitable in the future.
Even if a business does not seek bankruptcy protection or is liquidated, securities become worthless if the underlying business is worthless. Stockholders do not need to wait for a declaration of bankruptcy or cessation of business in order to take the capital loss on the worthless security.
If a stock is truly worthless, the capital loss deduction for a worthless security must be taken in the year the security becomes worthless. This rule can have harsh consequences if the taxpayer is unaware that the securities have become worthless.
If a stock still has a minuscule amount of value and is still trading on the open market, a taxpayer can still take advantage of the capital loss by selling the shares before year-end. If you have questions regarding worthless securities, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
