IRS Tax Write-offs for Worthless Stock
It can be painful to watch an investment shrink to essentially zero, but this happened to millions of investors who bet on Worldcom and Enron, not to mention countless others who invested in unknown penny stocks only to watch them flame out. However, you can sell the stock, report the loss to the IRS, and save some money on your income tax.
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You Are Only Taxed on Realized Gains and Losses
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The IRS doesn't care if you portfolio grew or shrank each year you file your taxes. Instead, the IRS takes note when you "realize" those losses or gains when you actually sell your stock. Selling stock is a taxable event, and you report the amount you earned from the sale, as well as the amount you paid for the stock.
Limits on Losses
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You are limited to taking a $3,000 deduction per year on stock losses or $1,500 if you are filing separately from your spouse. However, you can deduct the unused portion of the loss in future years. For example, if you lost $30,000 from the sale of a stock, you could deduct $3,000 from you reported income for the next 10 years.
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Breaking the $3,000 barrier
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If you report any gains from stock sales, you can offset these gains with your stock losses. For example, if you gained $1,500 from the sale of a stock, you can report $4,500 in losses that year in order to bring the final tally to a $3,000 loss.
Timing
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There are some years in which it may be more advantageous to reduce your taxable income than others. For this reason you may choose to wait a year or two before realizing your loss on your taxes. Just delay selling the stock until the timing is most advantageous to you. Of course, if the stock truly fizzles, you will receive a note from your broker that the stock is worthless, and you must take the loss that year.
Hire an Accountant
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Reporting gains and losses on stocks can get complicated. Unless you are well-versed in the schedule D, an accountant will pay for his or herself by taking the guesswork out of the process. The accountant can also advise you as to which year it will most advantageous to take the loss if you have a choice.
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