Worthless Securities

Worthless securities are investments, such as stocks, bonds, or other financial instruments, that have completely lost all value and are no longer marketable. When a security becomes truly worthless, the IRS may allow you to claim a capital loss on your tax return.

This tax treatment can help offset capital gains and, in some cases, reduce taxable income. However, the IRS requires clear evidence that the security has become completely worthless before a loss can be claimed.

When Is a Security Considered Worthless?

A security is generally considered worthless when it has no current value and no reasonable expectation of future value.

Situations that may indicate worthlessness include:

The issuing company has declared bankruptcy with no reasonable chance of recovery for shareholders.
The stock has been delisted and no longer trades on any exchange or market.
There is no buyer and no public market for the security.
The company has ceased operations and has no remaining assets.
The security has no liquidation value and is not expected to provide any future payment.

A significant decline in value alone does not make a security worthless.

For example, a stock that has fallen from $100 per share to $1 per share may still have value if it continues to trade. As long as a market exists and the investment retains some value, it generally is not considered worthless for tax purposes.

Tax Treatment of Worthless Securities

The IRS treats a worthless security as if it were sold for $0 on the last day of the tax year in which it became worthless.

This deemed sale creates a capital loss based on:

The original cost basis of the investment
A sale price of $0

The resulting loss will generally be classified as:

Short-term if the security was held for one year or less
Long-term if the security was held for more than one year

The holding period is determined the same way it would be for an actual sale.

When Must the Loss Be Claimed?

A loss from a worthless security must generally be claimed in the tax year the security became worthless.

Determining the correct year is important because claiming the loss too early or too late may result in IRS challenges or lost tax benefits.

Taxpayers should retain documentation supporting the year the security became worthless, such as:

Bankruptcy filings
Corporate liquidation records
Delisting notices
Brokerage statements
Public announcements indicating the company ceased operations

How to Report Worthless Securities

Worthless securities are reported as capital asset sales even though no actual sale occurred.

Form 8949

Report the security on Form 8949 as though it were sold for $0 on December 31 of the year it became worthless.

Generally, the entry includes:

Date acquired: Original purchase date
Date sold: December 31 of the year the security became worthless
Sales proceeds: $0
Cost basis: Original purchase price or adjusted basis
Description or explanation: "Worthless"

The resulting loss is calculated on Form 8949.

Schedule D

Amounts from Form 8949 are transferred to Schedule D, Capital Gains and Losses.

The loss is combined with other capital gains and losses to determine the taxpayer's overall net capital gain or capital loss for the year.

Example of a Worthless Security Loss

Suppose an investor purchased stock in a startup company for $5,000 in 2022.

In 2024:

The company files bankruptcy.
Shareholders receive nothing.
The stock becomes completely worthless.

The taxpayer would generally report:

Date acquired: March 15, 2022
Date sold: December 31, 2024
Proceeds: $0
Cost basis: $5,000
Explanation: Worthless

Because the stock was held for more than one year, the taxpayer would report a $5,000 long-term capital loss on the 2024 tax return.

How Capital Loss Rules Apply

The loss from a worthless security follows the same rules as other capital losses.

Capital losses can:

Offset capital gains
Reduce taxable income up to annual IRS limits
Be carried forward to future tax years if unused

This makes properly reporting a worthless security important if you have investment losses that may benefit your overall tax situation.

What If You Didn't Claim the Loss in the Correct Year?

If you discover that a security became worthless in a prior year and the loss wasn't reported, you may be able to correct the issue by filing an amended return.

Amending a Return

Taxpayers generally use Form 1040-X to amend the return for the year in which the security became worthless.

In many cases, a refund claim must be filed within the applicable statute of limitations, which is generally three years from the original filing deadline.

Supporting documentation should be retained to show when the security became worthless.

After the Amendment Deadline Has Passed

If the period for claiming a refund has expired, claiming the loss may become difficult or impossible.

Because the rules surrounding worthless securities can be complex, taxpayers with substantial losses may benefit from reviewing the situation carefully and gathering documentation that supports the timing of the loss.