Our writers and editors used an in-house natural language generation platform to assist with portions of this article, allowing them to focus on adding information that is uniquely helpful. The article was reviewed, fact-checked and edited by our editorial staff prior to publication.
A bad investment can go to near zero or close enough that it’s effectively worthless. But if you can’t sell it or it is never removed from your account (perhaps through the firm’s bankruptcy), your broker may not report that you’ve realized a loss, hampering your ability to claim a write-off and receive a tax break. But you do have ways around this and can write off worthless stock.
Here’s how to write off worthless stock and what you need to know to claim your tax break.
How to write off worthless stock so you can claim a tax break
The IRS gives everyone the ability to write off their stock losses and reduce their taxes. The process is called tax-loss harvesting, and you can use capital losses on investments such as stocks and exchange-traded funds to offset capital gains taxes. Plus, you can offset up to $3,000 each year in ordinary income, saving you even more, especially at higher tax brackets.
Normally this process is straightforward. You realize the loss by selling the investment, and your broker records the loss on its annual Form 1099-B for your account. Then you report the loss on Schedule D when tax time rolls around and you get your tax write-off.
But it can be a bit more complicated when you haven’t sold the position and realized the loss. That can happen in a few circ*mstances:
- The stock goes to zero or very close, and you’re unable to sell your position to anyone.
- The company goes bankrupt, but its stock remains in your brokerage account for some reason, and it’s unsellable.
- A long-term option may also become effectively worthless but is unsellable and won’t be removed from your account until it expires, perhaps in a subsequent tax year.
In these circ*mstances the IRS has a workaround that can help you claim your tax loss.
How to write off your investment loss
When you otherwise can’t dispose of your effectively worthless investment, the IRS allows you to abandon your investment and legally claim your loss. “To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it,” according to the agency.
Here’s what you need to do to report your loss:
- Report any worthless securities on Form 8949. You’ll need to explain to the IRS that your loss totals differ from those presented by your broker on your Form 1099-B and why.
- You need to treat securities as if they were sold or exchanged on the last day of the tax year.
- Figure your holding period based on that assumed sale date, with assets held for more than a year counting as long term and those for a year or less as short term.
You can then report the total loss on Schedule D recognizing the loss from the worthless stock. This process allows you to claim the capital loss and lets you get your tax break.
Bottom line
If you have a worthless asset, you can claim your tax write-off and reduce your taxable income. But it’s important that you follow the IRS procedures, because your brokerage may not report your loss on worthless securities that remain in your account if you can’t dispose of them.
FAQs
Here's what you need to do to report your loss: Report any worthless securities on Form 8949. You'll need to explain to the IRS that your loss totals differ from those presented by your broker on your Form 1099-B and why. You need to treat securities as if they were sold or exchanged on the last day of the tax year.
Can you claim a tax-loss on worthless stock? ›
The Internal Revenue Service (IRS) requires that the loss from a worthless security be claimed in the tax year that the security became worthless.
Can you write-off worthless inventory? ›
Key Takeaways
An inventory write-off is the formal recognition of a portion of a company's inventory that no longer has value. Write-offs typically happen when inventory becomes obsolete, spoils, becomes damaged, or is stolen or lost.
How do you get rid of worthless stock? ›
If for whatever reason you cannot sell the worthless shares, then you will need to obtain documentation that will convince the IRS that the stock really, truly had no value at some point in time, and close the position at that same time. This will relieve you of the burden of selling the shares.
Do you get a tax break for losing money on stocks? ›
You can deduct your loss against capital gains. Any taxable capital gain – an investment gain – realized in that tax year can be offset with a capital loss from that year or one carried forward from a prior year. If your losses exceed your gains, you have a net loss. Your net losses offset ordinary income.
How do you write off a stock that went to zero? ›
How to write off your investment loss
- Report any worthless securities on Form 8949. ...
- You need to treat securities as if they were sold or exchanged on the last day of the tax year.
Worthless securities will have a market value of zero as noted above. For a security to become worthless, it not only needs to have no value, but it needs to have no potential to regain value. For example, a company's stock might reduce in value to zero if the market fluctuates enough.
How to write-off dead stock? ›
On your balance sheet, debit your cost of goods sold (COGS) and credit your inventory write-off expense account. If the amount of loss is material, it should be identified separately in the income statement. Add comments justifying the write-off (e.g., explaining that the inventory was damaged, stolen, spoiled, etc.).
How do you write-down obsolete inventory? ›
Obsolete inventory is written-down by debiting expenses and crediting a contra asset account, such as allowance for obsolete inventory. The contra asset account is netted against the full inventory asset account to arrive at the current market value or book value.
Is obsolete stock tax deductible? ›
Please note, that while a provision for obsolete stock is not deductible, specific stock written off is deductible. Writing off inventory involves removing the cost of 'no-value' inventory items from the accounting records.
First off, be sure it is deemed worthless. Then, Report the valueless stock in either Part I or Part II of Form 8949, depending on whether it was a short-term or long-term holding. If an asset became worthless during the tax year, it is treated as though it were sold on the last day of the year.
How do you liquidate dead stocks? ›
Resurrect the value of your dead stock and make room for new inventory using the following best practices.
- Put dead items on sale. ...
- Offer them as a free gift. ...
- Donate them. ...
- Offer product bundles. ...
- Try to return them to supplier. ...
- Build brand partnerships. ...
- Open new sales channels.
How Do I Deduct Stock Losses on My Tax Return? You must fill out IRS Form 8949 and Schedule D to deduct stock losses on your taxes. Short-term capital losses are calculated against short-term capital gains to arrive at the net short-term capital gain or loss on Part I of the form.
What is the 3000 tax credit for stock losses? ›
A capital gain or loss is generated from the difference between an asset's adjusted basis and the amount realized from the sale. The IRS allows investors to deduct up to $3,000 in capital losses per year. The $3,000 loss limit is the amount that can be offset against ordinary income.
How many years can you write off stock loss? ›
If the net amount of all your gains and losses is a loss, you can report the loss on your return. You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.
How to write off more than 3000 capital losses? ›
Capital losses that exceed capital gains in a year may be used to offset capital gains or as a deduction against ordinary income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.
Can you deduct losses from failed investments? ›
Key Takeaways
You can use a capital loss to offset ordinary income up to $3,000 per year If you don't have capital gains to offset the loss. You can take a total capital loss on the stock if you own stock that has become worthless because the company went bankrupt and was liquidated.
How to report worthless stock on tax return turbotax? ›
First off, be sure it is deemed worthless. Then, Report the valueless stock in either Part I or Part II of Form 8949, depending on whether it was a short-term or long-term holding. If an asset became worthless during the tax year, it is treated as though it were sold on the last day of the year.
Can you claim a loss on shares in your tax return? ›
Capital losses
You can only claim a loss for shares or units you have disposed of. You can't claim a 'paper loss' on investments you continue to hold because they may have decreased in value.
Will a worthless securities transaction appear on my 1099 tax form? ›
In the TaxAct program you need to enter worthless securities on Form 1099-B Proceeds From Broker and Barter Exchange Transactions for it to automatically transfer to Form 8949 Sales and Other Dispositions of Capital Assets (if you need help accessing Form 1099-B, go to our Form 1099-B - Entering Capital Gains and ...
