If you own stock that became totally worthless during the tax year, this is not considered a bad debt for tax purposes. Instead, it is treated as a capital loss.
What Is a Worthless Security?
A worthless security is one that has no value and is permanently abandoned. To abandon a security, you must:
- Permanently surrender and relinquish all rights in the security.
- Receive no consideration in exchange for it.
Worthless securities include stocks, bonds, or other securities that have become valueless.
How to Report the Loss
Treat the worthless security as if it were sold or exchanged on the last day of the tax year. You must determine the holding period to classify the loss as either:
- Short-term capital loss (held for one year or less).
- Long-term capital loss (held for more than one year).
Report the loss on Schedule D (Form 1040) and also complete Part I or Part II of Form 8949, depending on whether the loss is short-term or long-term.
In Form 8949, write “Worthless” in the appropriate column to indicate the nature of the loss.
Special Case: Section 1244 Stock
If the worthless stock qualifies as Section 1244 small business stock, you may be able to report an ordinary loss (up to $50,000 for single filers or $100,000 for joint filers) on Form 4797. Any excess loss must be reported on Form 8949 as a capital loss.
Important Notes
- Capital losses can offset capital gains and up to $3,000 of ordinary income per year (if not fully used).
- Any unused capital loss can be carried forward to future tax years.
- Always keep detailed records of your investment and abandonment to support your claim.
Source:
Schedule D (Page 6)
Form 8949 (Page 2)
Form 4797 (Page 8)
Disclaimer: Always verify details with official IRS forms, instructions, and publications. OLT (Online Taxes) provides guidance based on retrieved context but does not replace official tax advice from the IRS or state revenue departments.