How to Claim Cancelled Stock on Your Federal Income Taxes
In turbulent financial times, stocks can become worthless when companies cease operations or file for bankruptcy protection. Investors can claim losses for cancelled stock on their income taxes.
IRS rules governing cancelled stock cover corporate stock, stock subscriptions, bonds and notes or other evidence of indebtedness issued by a government or corporation.
Cancelled stock is treated as sold or exchanged on the last day of the tax year, and may generate a long- or short-term capital loss or an ordinary loss, depending on how long the stock was held and what type of company issued the stock.
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Things You'll Need
- Documentation of the stock's basis
- IRS Schedule D (Form 1040), Capital Gains and Losses
- IRS Form 4797, Sales of Business Property
Instructions
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Claiming Cancelled Stock
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Deduct losses from cancelled stock in the year the asset becomes worthless. If you failed to include a deduction for cancelled stock in the relevant year, Internal Revenue Code Section 6511(d)(1) extends the normal period for claiming a refund for loss claims due to cancelled stock. The claim must be filed within seven years from the original date the return for the loss had to be filed or two years from the date taxes from that return were paid, if that date is later.
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Claim your cancelled stock loss using IRS Schedule D (Form 1040), Capital Gains and Losses, if your stock was held in a publicly traded corporation. Write "worthless" across columns (c) and (d) instead of including the date sold and sales price. Short-term losses occur if the stock was held for one year or less; long-term losses occur when the stock was held for greater than one year. Use the last day of the tax year as the sale date to determine whether the gain is short- or long-term.
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Claim your cancelled stock loss as an ordinary loss using Form 4797, Sales of Business Property, Line 10 if the stock was held in a Section 1244 small business stock. Section 1244 companies are domestic small business corporations and must have derived at least 50 percent of their gross receipts from sources other than rents, royalties, dividends, annuities, interest and gains from sales or trades of securities and stock during its five most recent years before the cancelled stock loss.
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Claim up to $50,000 in ordinary loss in one year for single filers with Section 1244 cancelled stock, or up to $100,000 for married filing jointly filers. The excess is considered a capital loss and should be included in IRS Schedule D.
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Determine whether Section 1244 cancelled stock is worthless based on all facts and circumstances. Consider both its liquidating value and any value it may acquire based on the future operations of the business.
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Retain documentation of the asset's tax basis and the overt act of business abandonment to defend challenges to your loss deduction. With your tax return, provide a written statement to the IRS that includes the name and address of the Section 1244 business, the reason the stock became worthless and the approximate date it became worthless.
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