How to Report a Loss for Worthless Securities on Your Taxes

Your capital gains or losses from Schedule D are reported on your Form 1040.

Securities are investment instruments usually traded in financial markets. They include stocks, bonds, notes and options. Widely traded investments change in value daily. These changes result in you incurring a capital gain or loss when you sell the security. The situation with worthless securities is different in that you obviously cannot sell them. The date you establish for the stocks becoming worthless is important for reporting your loss to the Internal Revenue Service.

Things You'll Need

• Calculator
• Schedule D tax form (see Resources)

Instructions

1. Record the date of purchase and amount paid for the security. Write down any expenses connected with the purchase and holding of the security (commissions, fees or other costs to you). Establish the taxable year in which the security became worthless. If this is a year for which you have already filed a tax return, you need to file an amended return for that year.

2. Determine if your capital loss on the security is short-term or long-term. If more than a year elapsed from the purchase date to the date you established that the security became worthless, your loss is a long-term loss; less than a year makes it a short-term loss. This determination tells you where to enter the information on Schedule D of your Form 1040.

3. Fill out Schedule D for your Form 1040 with the information on your worthless security and on any other securities on which you had taxable capital gains or losses in the current tax year. Calculate your net short-term capital gain or loss; then calculate your long-term gain or loss. If these calculations show gains in both categories, you have an overall capital gains tax liability. A loss in either or both categories allows you to deduct up to $3,000 ($1,500 if married and filing separately) from your ordinary income. If the losses are greater than the allowed amount, you can carry them forward to subsequent years and use them to reduce your taxes resulting from your capital gains or ordinary income.

Tips & Warnings

• Obtain information from the seller of the security, if possible, as to when the security lost its value.

• Use a tax accountant to help you do your Schedule D.

• If you have any uncertainty about any aspect of reporting your capital losses, contact the IRS in order to avoid expensive problems later.

References

• BusinessDictionary.com: Securities
• IRS.gov; Loss Deductions for Diminution in Value of Stock Attributable to Corporate Misconduct; April 2004
• IRS Reminds Taxpayers They Can Use Stock Losses to Reduce Taxes

Resources

• IRS.gov: Investment Income and Expenses (Including Capital Gains and Losses)
• IRS.gov: Schedule D (Form 1040)
• IRS.gov: Form 1040