When is a stock worthless for tax purposes? Hint: It may not be when you think.
In general, a stock is worthless when you permanently surrender all rights and you receive no consideration for doing so. “Surrender” doesn’t necessarily mean “worthless” however. For example, say you gift a stock to a family member. While you’ve relinquished your rights and received nothing in return, the stock still has value.
What if you own stock in a company that files for bankruptcy? Does that make the stock worthless for tax purposes? The determination can depend on the type on bankruptcy. For example, in a Chapter 11 bankruptcy, which offers an opportunity for restructuring, shares might still be trading, and have some value. In a Chapter 7 bankruptcy, a company stops operating, and it’s unlikely you’ll receive any proceeds.
One way to establish the worthlessness of a publicly traded stock is to ask your broker to sell your shares. If there are no buyers, the stock is probably worthless. You may be able to get a statement from your broker verifying this.
Keep in mind that you have a little more to do before you can claim the loss—you must determine when the stock became worthless. That’s because you can only take a deduction for a worthless stock in the year it no longer had value. If it turns out that occurred in a different year, you may want to amend your prior returns. You have up to seven years (instead of the usual three year limit) to amend a tax return to report the loss from a worthless stock.