Worthless securities have a market value of zero and can lead to a capital loss for the owner, which can be accounted for during tax filings.
Key Takeaways
- Worthless securities include stocks, bonds, or other investments with no market value. They could be publicly traded or privately held.
- The IRS advises treating worthless securities as if they were sold or exchanged on the last day of the tax year, enhancing the process of claiming them as a capital loss.
- The holding period will determine if the loss is short-term (one year or less) or long-term (greater than one year).
- Penny stocks have minimal market value but aren’t considered worthless unless their value drops to zero.
Understanding Worthless Securities
Worthless securities encompass stocks or bonds—publicly traded or privately held—aiding in outlining them as a capital loss according to IRS guidelines. Investors manage them as they would any other capital asset, deeming it sold on the final day of the tax year. Establishing the benefit_loss period is crucial—short-term losses (one year or less) differ from long-term losses (greater than one year).
Reporting Process
For short-term losses, report them in Part I of Schedule D. Short-term gains and losses can be netted to see the net gain or loss. Long-term losses are reported in Part II of Schedule D, and netting long-term gains and losses gives the long-term net gain or loss. Completing these steps separately in Parts I and II yields an overall result after combining them.
Strategies leveraging worthless securities, like tax selling, involve selling a losing asset to offset gains within related investments.
Distinguishing Worthless Stocks In Today’s Market
Public vs Private Valuation
Market value for a public company is calculated by multiplying outstanding shares by the current share price. Private company values stem from comparisons with similar enterprises or discounted cash flow estimates. Zero market value typifies worthless securities—no return potential exists.
For instance, a stock may drop to zero following market fluctuations; however, it isn’t deemed worthless if the company retains recovery potential. Conversely, stocks of defunct, bankrupt companies would be worthless.
Penny Stocks: High-Risk, Potentially Worthless
These often-volatile stocks trade below $5, frequently outside main exchanges. Their high-risk nature stems from limited liquidity, broad bid-ask spreads, small capitalizations, and insufficient disclosures.
Examples of Penny Stocks:
- Wrap Technologies, Inc. (WRAP)
- LiqTech International, Inc. (LIQT)
- Smith Micro Software, Inc. (SMSI)
- Red Cat Holdings, Inc. (RCAT)
- VIA optronics AG (VIAO)
- National CineMedia, Inc. (NCMI)
Claiming Worthless Securities: How-To for Investors
Reporting Process
By preparing IRS Form 8949 with your transaction dates, purchase prices, sale amounts, and more, investors formalize their claims.
Eligibility
Worthless stock can be claimed in the year it becomes worthless, guiding when to file related tax benefits.
Tax Focus
Acknowledged as a capital loss, it provides value during the filing year it’s rendered worthless, offering remarkable tax offsets.
Related Terms: capital loss, holding period, publicly traded securities, privately held securities, penny stocks.
References
- Internal Revenue Service. “Losses (Homes, Stocks, Other Property)”.
