Here’s how to sell your worthless shares of stock that have lost all of their value. If you hold shares that have become worthless, maybe because the company has ceased operations, you are probably interested in deducting the full cost basis of that position when you do your taxes. And, since you’re already in the hole, you probably want to do this without throwing any more money away. This article discusses ways you can prove to the IRS that the shares really are worthless.
The simplest and best way to close out any position, of course, is to sell it, even if you only get a dollar. But who is going to pay you even a lousy buck for worthless shares?
If you hold the share certificates, you can probably convince one of your friends or (deep breath) relatives to buy them from you for $1. (You can give back the $1, buy the proud new owner a drink, etc.) Then list the $1 as your selling price on your tax form. If your friend really wants to take official possession of the shares, he or she must send in the properly signed share certificates to the stock transfer agent, but of course if the company really is gone, the transfer agent is not going to do anything (no money, no work).
If your broker holds the shares (the shares are held “in street name”), selling them to a friend isn’t such a good deal because taking delivery of the certificates will cost you about $25 (depending on the brokerage house, of course). And you sure don’t want to pay a brokerage commission to get rid of your worthless shares. Many brokers have a plan to let their good customers sell them worthless stock for $1 or 1c for the lot. If you are a good customer, and stock is with the broker, ask. You should be able to negotiate some solution that will be satisfactory to both sides.
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. It’s very important that you can demonstrate beyond a doubt theyearthat the shares became worthless. When you do your taxes, you would write “12/31” as the date of sale and “worthless” (or 0) as the sales price. For example, if the company has delisted the shares or closed down completely, a letter from your broker or even a letter from the company might be sufficient to establish the year in which the shares became worthless.
Interestingly, if you had shares that became worthless, and you declared them worthless, took the loss, yet hung on to the shares, you’re OK if they later regain value. The IRS now anticipates that a stock you kept while declaring it to be worthless later rises from the dead. In that case, no need to amend, but use the worthless date as the acquisition date and 0 as the cost basis. So in this regard they are pretty lenient.
Note that if a company’s stock goes worthless, you should declare this event in the year it becomes worthless. If you have to file an amended return (1040X) later, you have 7 years to do so, unlike 3 years for most other 1040X filings.
As you can see, it’s far simpler to sell the shares for a pittance than to demonstrate that they are worthless, so that’s probably the way to go if you can manage it. Although this does not establish the year in which the shares became worthless, it does give you a clear sale at a very low price, and that’s always simple to explain.
Is a Bankrupt Company’s Stock Worthless?
One last caveat. Don’t confuse a bankrupt company with a completely defunct company. Many companies continue operating while in bankruptcy proceedings, and their stock continues to trade. So the stock by definition is not worthless. In the newspaper listings, the prefix ‘vj’ is often used to indicate such companies.
For example, when this article was first drafted, vjRAYtc (Raytech) closed at 4/38. However, a bankrupt company does not always have a low share price. About 25 years ago John Manville Co. was hit with asbestos lawsuits, and filed for bankruptcy to protect them against these suits. Except for the potential liabilities of the law suits, they had an enormously healthy balance sheet and their stock continued to trade high. More recently, about 1991 Columbia Gas of Ohio filed for bankruptcy to get out of some unfortunate long-term contracts they had written for natural gas purchases. Their stock continued to trade, generally in the $30 range, until they finally emerged with a favorable court ruling.
Article Credits:
Contributed-By: Art Kamlet, Chris Lott
FAQs
Sell Worthless Stock if Your Broker Holds the Shares
What happens if your shares become worthless? ›
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values. The New York Stock exchange (NYSE), for instance, will remove stocks if the share price remains below one dollar for 30 consecutive days.
What are the requirements for a worthless stock loss? ›
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. If the company has a chance to regain ground in the market, it would not be worthless stock.
How do I sell unwanted shares? ›
There are a couple of options available:
- Selling through the share registry. The first option is to sell your shares directly through the registry, such as Computershare or Link Market Services. ...
- Selling through a broker. The second option is to transfer the shares from the registry to your broker and then sell them.
When To Sell And Take A Loss. According to IBD founder William O'Neil's rule in "How to Make Money in Stocks," you should sell a stock when you are down 7% or 8% from your purchase price, no exceptions. Having a rule in place ahead of time can help prevent an emotional decision to hang on too long.
Who buys worthless stock? ›
Most brokerage firms will purchase worthless stock for a nominal amount (one cent) just to provide closure for their clients. This is probably the best solution for tax purposes.
Do I lose my money if a stock is delisted? ›
Though delisting does not affect your ownership, shares may not hold any value post-delisting. Thus, if any of the stocks that you own get delisted, it is better to sell your shares. You can either exit the market or sell it to the company when it announces buyback.
How do you claim capital loss on shares of delisted companies? ›
The delisting of shares results in the impossible selling of shares until the company goes through the exit route. It is effectively irrecoverable and is a loss to the taxpayer. Once the company goes through liquidation or is referred to NCLT under IBC, NCLT declares the company to drop the shares and claim the loss.
What is the statute of limitations on worthless securities? ›
If you don't claim the deduction in the year your securities become worthless, you have up to seven years from the due date of your return for that year to claim the deduction by filing an amended tax return for the year. This will give you a credit or refund due to the loss.
What is an example of a worthless stock? ›
Liquidation: The court orders the liquidation of TechStart Inc. The proceeds from the liquidation are used to pay off creditors, but nothing is left for the stockholders. Stock Value: The stock of TechStart Inc. is delisted from the stock exchange, and it becomes worthless.
These methods are the valuation-level sell, the opportunity-cost sell, the deteriorating-fundamentals sell, the down-from-cost and up-from-cost sell, and the target-price sell.
What are the disadvantages of selling shares? ›
One of the primary disadvantages of selling shares is the potential loss of control for existing shareholders, especially if you sell a significant portion of ownership to external investors. New shareholders may have differing opinions on business strategies and decision-making, which could lead to conflicts.
How do you clear old stocks? ›
- Discounts/sales. One of the best ways to get rid of excess inventory is holding sales and discounting items. ...
- Liquidation companies. There are liquidation companies that purchase excess inventory at a cut-price from businesses. ...
- Remarket products. ...
- Bundling products to get rid of excess stock. ...
- Donate unwanted products.
The strategy is very simple: count how many days, hours, or bars a run-up or a sell-off has transpired. Then on the third, fifth, or seventh bar, look for a bounce in the opposite direction. Too easy? Perhaps, but it's uncanny how often it happens.
What is the wash sale rule? ›
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
How do you avoid the wash sale rule? ›
This method is employed as a means of lowering the investor's taxable income. To avoid triggering the wash sale rule, an investor can employ a strategy such as buying more of the stock that they'd like to sell, holding on to the new stock purchase for 31 days, and then selling it.
What happens if shares go to zero? ›
Stock prices can fall all the way down to zero. That means the stock loses all of its value and a shareholder's earnings are typically worthless. In this case, the investor loses what they invested in the stock.
What happens if a share value becomes zero? ›
A drop in price to zero means the investor loses his or her entire investment: a return of -100%. To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good (short positions) or bad (long positions).
What happens if no one buys your shares? ›
When there are no buyers, you can't sell your shares—you'll be stuck with them until there is some buying interest from other investors. A buyer could pop in a few seconds, or it could take minutes, days, or even weeks in the case of very thinly traded stocks.
What happens to puts if a stock goes to zero? ›
For a put option buyer, the maximum loss on the option position is limited to the premium paid for the put. The maximum gain on the option position would occur if the underlying stock price fell to zero.
Here’s how to sell your worthless shares of stock that have lost all of their value. If you hold shares that have become worthless, maybe because the company has ceased operations, you are probably interested in deducting the full cost basis of that position when you do your taxes. And, since you’re already in the hole, you probably want to do this without throwing any more money away. This article discusses ways you can prove to the IRS that the shares really are worthless.
