Can I claim a loss on my worthless securities?

Sometimes an investment doesn’t go well. Maybe the company goes bankrupt or is liquidated. Can you claim a capital loss on worthless securities held as an investment? The answer is, maybe.

Thompson Reuters has gathered some information to help people determine if their securities are considered worthless and can be claimed as a loss. Here is a brief summary of their findings:

• If the security has become wholly worthless, a loss can be taken in that year. Partial losses cannot be claimed on this basis. [IRC Sec. 165(g)(1)]
• The sale of assets and distribution to creditors in bankruptcy can establish nothing was received by the taxpayer for the stock. [INFO 2010-0157]
• A stock is deemed worthless if the company elects to be treated as a “disregarded entity” with liabilities exceeding assets (including intangibles.) [Rev.Rul.2003-125]
• A bona fide transaction transferring ownership of the security at a loss to an unrelated third party allows a claim in the year of transfer.
• You may abandon a security by permanently surrendering and relinquishing all rights in the security, as long as you receive no consideration in exchange for it. The easiest way to do this is to surrender it to your brokerage firm. [Reg. 1.165(i)]

Knowing this can be confusing, there is a seven-year statute of limitations (instead of the normal three-year period) to file an amended return showing a capital loss from a worthless security. [IRC Sec. 6511(d)(1)] Any questions concerning whether a claim can be made should always be discussed with a tax professional.

• by Lisa S Duncan, CSM, Administrative Assistant