Posted by UNIVERSAL ACCOUNTING & FINANCIAL SERVICES INC.

What Are Worthless Securities?

What Are Worthless Securities?

The market value of worthless security is zero. Typical examples are bonds or stocks that are publicly traded or held privately. Such securities and other securities abandoned by the investor creates a capital loss. The owner can claim such loss during tax filing season. 


What is Worthless Security?

Before the loss from worthless security can be classified as a capital loss, Uncle Sam advises that one treat them like capital assets sold or swapped on the last day of the tax year. Investors need to estimate the holding period to know whether they have a long term (over one year) or short term (less than a year), just like with many other securities.

For Short term loss, it must be reported on part 1 of schedule D and there is also the provision to net short term losses and gain against each other to estimate the net short term loss or gain.

In terms of long term losses, these will be reported in Part 2 of Schedule D. There is also the provision to net long term losses and gains against one another. With this, the investor can estimate the net long-term loss or gain. On completing the estimations in both parts of schedule D, the taxpayer can net them together to have an overall result. 


How to Deal With Uncertainty 

There are times a taxpayer might not be able to decide quickly if the shares have value or not. One might not know if claiming a loss for the year is a good move or look for a telltale sign. People in these categories can benefit from two suggestions;

  1. The first approach is to attempt to dispose of the share via a sale. Some cooperative brokers might be willing to buy. Doing this, at times, could be difficult and could also come with significant costs. We can assume that the shares should be worthless in the previous year, and it is recommended to claim the loss in that year. 


  1. Another approach is one of the opinions of a judge. The judge advises that:  


One might claim the loss for the nearest year if there is a chance it is allowed, and one can renew the claim in the years to come, provided there is a good chance it will be applicable in the coming year.


With this, as the years go by, one would need to renew the claim as long as Uncle Sam did not allow the earlier claim, and the loss on the claim cannot be doubled. It might not be a great idea to lay claim to the functional loss in any year that it appears possible as the particular statute of limitation for this loss removes some pressure. 


Claiming the Loss

In claiming the loss, it must reflect as a capital loss on Schedule D. There is no provision to claim a theft loss with a theory that the stocks were worthless because the directors became a bunch of thieves – even if you have got proof. 

Your loss amount is a factor of your share basis. The stock might have risen well before it sank again, which might make one conclude that the loss was way above the share amount. This unrealized profit cannot be included in the deduction amount. 

The loss must be reported like you sold the shares with zero dollars on the tax year’s final day. It does not matter if what triggered the worthlessness occurred earlier. 

Taxpayers should note that a few limited exemptions exist for which some shares from small business loss will be classified as ordinary losses and not capital gains. 


Statute of Limitation 

There is the provision to amend a previous year's return for you to claim the loss. Since there is a general difficulty for everyone to determine the exact year they will claim the loss, Congress made available a special seven-year limitation period that helps report a loss arising from worthless security. 

For people that are just coming to terms that a few of their shares became worthless four to seven years ago, there is still time to change their return to claim the loss. The deadline is seven years after the exact date the stock became worthless.


FOR MORE INFORMATION OR TO CONTACT Universal Accounting & Financial Services, Inc, TO SEE HOW WE CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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