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Is Your Stock Worthless or Worth Less?

post #1 of 2
Thread Starter 
I was doing a little research on what the IRS considers a worthless stock. I wasn't sure if you had to sell your shares to get a write off. Maybe this is common knowledge, but I learned a few things. Article is a little old but seems to be valid.


QUESTION: How do I go about having a stock declared worthless?
Anonymous
ANSWER:
If you're one of the unfortunate folk who still hold shares of bankrupt companies like Enron (ENE) or Polaroid (PRDCQ), then you're probably looking forward to taking a worthless-stock write-off on your 2001 tax return. And with good reason: If you can prove that your investment is worthless, the IRS allows you to take a capital loss on Schedule D. It treats the worthless stock as a sale for zero dollars on the last trading day of the year, regardless of when the "worthlessness" actually occurred — which could be important in determining whether you have a long- or short-term capital loss. Plus, you don't have to fork over the brokerage fee for unloading the worthless shares. The trick is that you must take the write-off in the same tax year that the stock completely loses its value. But while you might think the stock of a company that has declared bankruptcy is worthless, the IRS might not agree. First, and most obvious, a 68-cent stock like Enron's, while far off its highs, isn't worthless at all. In fact, shares have more than doubled since touching a low of 26 cents on Nov. 30. Millions of shares still change hands each day on the New York Stock Exchange. A truly worthless stock, by contrast, must have no economic value. To prove that's the case with your stock, you could obtain a letter from a broker saying that he or she is unable to find a buyer for the stock, says Ron Hegt, a CPA and partner at Hays & Co. in New York City. A short letter, even just a sentence or paragraph long, is usually sufficient. You won't have to submit it with your tax return, adds Hegt, but you should have this letter in case of an audit.


Second, the IRS requires that the company in question must have ceased operations. But keep in mind that bankruptcy proceedings can take several years, and companies sometimes rise from the ashes, says Art Ford, a CPA and certified financial planner at Sullivan Bille in Tewksbury, Mass. Just because your company has filed for bankruptcy doesn't mean that it has actually stopped operating — so it may be too soon to declare its stock worthless. And when your company isn't as big as Enron, it might be difficult to follow its bankruptcy proceedings closely. One resource is the Capital Changes Reporter, published by the Commerce Clearing House. This publication gives monthly updates on name changes, dividend payments, incorporations and stock worthlessness. Your broker or local library should have a copy.
If you can't prove that your shares are worthless, but are eager to get your deduction this year, then you could simply sell them and take the capital loss. Remember, you can deduct up to $3,000 in net losses per year, and anything beyond that can be carried over to offset gains in future tax years. (See our Capital Gains Guide for more details.) But if you're determined to take the full deduction on your worthless stock, then keep in mind that you have seven years to amend your tax return. So if your stock became worthless in 2001, you've got until April 2009 to prove it and file that amended tax return.
post #2 of 2
Great post coors
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