A stock or security becomes worthless when it no longer has any value and there is no reasonable expectation that it will regain value. This typically happens when a company completely shuts down, liquidates its assets, or becomes insolvent.
If a stock or security becomes worthless during the tax year, the IRS treats it as though you sold it on the last day of that tax year. Even though you did not actually sell the investment, you can generally claim a capital loss for the amount you invested.
Worthless securities can include:
- Stocks
- Bonds
- Certain other securities
- Property that you permanently abandoned without receiving anything in return
To qualify as an abandonment loss, you must have completely given up all ownership rights and received no payment or compensation for the asset.
Is the Loss Long-Term or Short-Term?
The type of capital loss depends on how long you owned the investment:
- Long-term loss: You held the asset for more than one year.
- Short-term loss: You held the asset for one year or less.
This distinction matters because long-term and short-term capital losses are reported separately on your tax return.
How Do I Enter a Worthless Stock in the Program?
Follow these steps to report a worthless stock or security:
- Go to Federal.
- Select Income.
- Choose Investments.
- Select Stocks, Mutual Funds, Cryptocurrency, Collectibles, etc.
- Enter the Date Acquired as the date you originally purchased the investment.
- For Date Sold, select the alternate option and choose either Worthless - Long-Term or Worthless - Short-Term, depending on how long you owned the asset.
- For the Sales Price, select the alternate option and choose Worthless.
- Enter your cost basis (generally what you paid for the investment) and any applicable adjustments.
What Information Will I Need?
Before entering the loss, gather:
- The date you acquired the investment
- Your original purchase price or cost basis
- Documentation showing the security became worthless, if available
- Any records of adjustments that affect your basis
Keeping these records can help support your loss if the IRS requests additional information.
Key Takeaway
When a stock or security becomes completely worthless, the IRS generally treats it as a sale on the last day of the tax year. You can report the loss as either short-term or long-term based on your holding period and claim the appropriate capital loss on your return.