When entering a capital gains transaction, you may see an option to mark the investment as worthless instead of entering a sale date.
A security is considered worthless only when it has completely lost all value during the tax year. In other words, the security's market value must be $0.
Before selecting this option, check the security's publicly available market value. If the investment still has any value at all, even a very small amount, it generally is not considered worthless.
What Types of Investments Can Be Worthless?
The IRS allows certain investments to be treated as worthless securities, including:
- Stocks
- Stock rights
- Bonds
These investments must have become entirely worthless during the tax year.
Are Penny Stocks Considered Worthless?
No. A penny stock may be worth very little, but it still has market value. As long as the investment has some value, it is generally not considered worthless for tax purposes.
How Does the IRS Treat Worthless Securities?
The IRS recommends treating a worthless security as though it were sold or exchanged on the last day of the tax year in which it became worthless.
This allows you to report the loss on your tax return, even if no actual sale took place.
Is the Loss Short-Term or Long-Term?
The holding period determines how the loss is reported:
- Short-term loss: You owned the security for 1 year or less.
- Long-term loss: You owned the security for more than 1 year.
Important: Use This Option Carefully
Marking a security as worthless is not a common situation. Only choose the Worthless option if you are confident the investment became completely worthless during the tax year.
If the security still has any market value, you should generally report the actual sale information instead of selecting "Worthless."
Related Tip
If you're unsure whether a security qualifies as worthless, review the investment's current market value and supporting records before filing. Keeping documentation can help support your tax return if questions arise later.