Worthless securities are investments—such as stocks, bonds, or other financial instruments—that have completely lost all value and are no longer marketable.
The IRS allows taxpayers to claim a capital loss for these securities only if they are truly worthless.
❓ What Makes a Security “Worthless”?
A security is considered worthless when all value is permanently lost, such as when:
- 🏚️ The issuing company has declared bankruptcy with no reasonable chance of recovery
- ❌ The stock has been delisted and no longer trades on any exchange
- 🚫 There is no buyer or public market for the security
- 🔒 The company has ceased operations and holds no remaining assets
- 💸 The security has no liquidation value and is not expected to pay out in the future
⚠️ Important:
A stock that has dropped significantly in price but is still trading is not considered worthless.
💰 Tax Treatment of Worthless Securities
- 📅 The IRS treats worthless securities as if they were sold for $0 on December 31 of the year they became worthless
- 📉 The resulting loss is a capital loss
- ⏱️ Short‑term or long‑term, depending on how long the security was held
- 🧾 The loss must be claimed in the tax year the security became worthless
🧾 How to Report Worthless Securities
✅ Form 8949 – Sales and Other Dispositions of Capital Assets
Report the security as if sold for $0 on December 31 of the year it became worthless:
- 📅 Date sold: December 31 of the year of worthlessness
- 💵 Column (d) – Sales price: $0
- 💲 Column (e) – Cost basis: Original purchase price
- 📝 Column (f): Enter “Worthless” as the explanation
- 📉 Column (h): Shows the resulting capital loss (automatically figured by program)
✅ Schedule D – Capital Gains and Losses
- Totals from Form 8949 carry over to Schedule D
- The loss is included in the taxpayer’s overall capital gain or loss calculation
📌 Example
A taxpayer purchased stock in a startup for $5,000 in 2022.
In 2024, the company declares bankruptcy, and the stock becomes completely worthless.
✅ The taxpayer reports a $5,000 long‑term capital loss on their 2024 tax return.
Form 8949 entry:
- 📅 Date acquired: 03/15/2022
- 📅 Date sold: 12/31/2024
- 💵 Sales price: $0
- 💲 Cost basis: $5,000
- 📝 Adjustment (f): Worthless
- 📉 Gain/Loss: ‑$5,000
⏳ What If the Loss Wasn’t Reported in the Correct Year?
1️⃣ File an Amended Return (Form 1040‑X)
- Taxpayers can amend the return for the year the security became worthless
- Generally allowed within 3 years from the original due date to claim a refund
2️⃣ Missed the Amendment Window?
- The loss may no longer be claimable
- In rare cases, a tax professional may explore options under IRC §165(g), but this:
- Requires documentation
- Is uncommon