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Posted by Pat Raskob

Worthless Securities

Worthless Securities

From the title, you can tell that worthless securities are just what they are: worthless, insignificant, and meaningless. These are securities with ZERO market value and may include stocks publicly or privately traded. Worthless securities are also securities abandoned by an investor, resulting in capital losses that can be claimed by the owner for the owner when filing tax forms. 

For an investor to declare a loss from worthless securities, the IRS advises that the investor treats the loss as capital assets exchanged on the last days of a yearly tax process. As it is with other securities, investors must know the “Holding period” for each asset to ascertain if the loss is a short-term or long-term loss. Short-term losses are from one year and below, while long-term losses are over one year.

If it is a short loss, the investors should report it on Part 1 of Schedule-D, and investors can also accumulate short-term losses and gains with each other to ascertain a combined short-term profit or loss. In the case of long-term losses, investors will report these in Part II of Schedule-D, and just as it is with short-term losses and gains, they can put it all together to net gains and losses. After calculating these gains and losses in Parts I and II of Schedule-D, the investor can accumulate them all together to get a total result. 

The valuation process for worthless securities 

Market capitalization is sometimes referred to as public company market value: the volume of shares of a publicly-traded enterprise multiplied by its updated share price (this is for a public company). The valuation method entails comparable business analysis with a private company with an estimation of reduced cash flow. When these aspects with private and public companies are considered, worthless securities hold zero market value. 

There is a general rule for deducting losses on worthless investment securities, which allows for the loss deduction for a security to be named worthless during a tax year, but this is if the security is a capital asset for the taxpayer. The deduction is considered when the taxpayer cannot or is unwilling to dispose of the security in a taxable transaction. 

The losses deduction for worthless securities can be gotten in the tax year when the securities have tagged as completely worthless, and the taxpayer handles this process. Worthlessness happens due to a known event: bankruptcy, business activity termination, or liquidation, but such an event is not necessary for making worthless claims if the enterprise is insolvent. 

Even though the classification of worthlessness is not objective, the court can uphold such claims (if in dispute) when there is no arguable possibility that the investor will receive value. 

If your investment portfolio has some securities you think are worthless, you may be eligible for tax deductions. As there are special regulations that relate to worthless securities and the rule states that worthless securities must not have any value. Please note that a stock may plummet in value but still cannot be tagged “worthless.”

For a security to be completely worthless, it must not only lack value but also lack the potential value. The evidence of worthlessness must also be clearly indicated during tax filings to show the lack of probability of realizing any profit from a sale of liquidation of security. For example, suppose a business stops its operations and sells off its assets. In that case, this may not be established as a case of worthless securities if the shareholder may recover some money from litigation. 

Lastly, some taxpayers assume that a bankrupt company’s shares are worthless, but stocks of bankrupt companies sometimes hold value and may not be worthless. The stock may also have “potential’ value if the venture will become profitable in the future. So stockholders shouldn’t wait for the business to declare bankruptcy or cessation of services to take a capital loss on worthless securities.



Pat Raskob
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