If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.
When a stock's value falls to zero, or near zero, it typically signals that the company is bankrupt. The stocks are frozen and unless the company restructures, it's likely you will lose your investment.
Here's what you need to do to report your loss: Report any worthless securities on Form 8949. You'll need to explain to the IRS that your loss totals differ from those presented by your broker on your Form 1099-B and why. You need to treat securities as if they were sold or exchanged on the last day of the tax year.
Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately). You can reduce any amount of taxable capital gains as long as you have gross losses to offset them.
The simplest and most effective way to protect your equity through risk management is to establish strict loss parameters and abide by them. One popular method is the 2% Rule, which means you never put more than 2% of your account equity at risk (Table 1).
You should write off inventory that has lost value due to damage, deterioration, loss from theft, damage in transit, changes in market demand, obsolescence, or misplacement.
1 You don't have to report gains or losses on any stocks or other securities until they are sold. Gains on appreciated holdings that you still own are not reportable until you sell them, at which time you realize a gain or loss.
To prove a stock is worthless and take the worthless stock deduction, you must show that the stock is no longer traded, has declared bankruptcy, has no market value (if not publicly traded), or is in the process of liquidation. This can include public records, news articles, or correspondence from the company itself.
If you are an investor, it is likely that you have made an investment that went bad at some point. The IRS won't give you back the money you lost, but Uncle Sam will let you take a deduction for the loss.
Investors often wonder where their money went when stocks plummet. Stock price shifts are more about changing perceptions of value rather than money physically moving from one place to another. So in truth, it doesn't vanish—instead, the investment's perceived value changes.
For a put writer, the maximum gain is limited to the premium collected, while the maximum loss would occur if the underlying stock price fell to zero.
For instance, say you sell 100 shares of stock short at a price of $10 per share. Your proceeds from the sale will be $1,000. If the stock goes to zero, you'll get to keep the full $1,000. However, if the stock soars to $100 per share, you'll have to spend $10,000 to buy the 100 shares back.
What Happens If a Stock Price Goes to Zero? If a stock's price falls all the way to zero, shareholders end up with worthless holdings. Once a stock falls below a certain threshold, stock exchanges will delist those shares.
Selling a stock for profit locks in "realized gains," which will be taxed. However, you won't be taxed anything if you sell stock at a loss. In fact, it may even help your tax situation — this is a strategy known as tax-loss harvesting. Note, however, that if you receive dividends, you will have to pay taxes on those.
Can a stock ever rebound after it has gone to zero? Yes, but unlikely. A more typical example is the corporate shell gets zeroed and a new company is vended [sold] into the shell (the legal entity that remains after the bankruptcy) and the company begins trading again.
The Internal Revenue Service (IRS) requires that the loss from a worthless security be claimed in the tax year that the security became worthless. This can be a complex determination since it is not always obvious when a security loses all value.
A loss can be deducted from other reported taxable income up to the maximum amount allowed by the Internal Revenue Service (IRS) if the total net figure between short- and long-term capital gains and losses is a negative number, representing an overall total capital loss.
A stock becomes worthless when it falls to zero and has no value. In this case, an investor loses the money they invested in the stock.
Current tax law does not allow you to take a capital gains tax break based on your age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales, though this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
Investors can pursue legal action against their broker—i.e. file a claim or lawsuit—if they feel losses were a direct result of their actions.
An easy and impactful way to reduce your capital gains taxes is to use tax-advantaged accounts. Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes on assets while they remain in the account.
If the value of an estate is large enough to qualify for federal estate taxes, then stocks that are included will be taxed as part of the overall value of the estate. The federal estate tax threshold was raised to $13.61 million per individual and $27.22 million per married couple in 2024.
A write-down reduces the value of an asset for tax and accounting purposes, but the asset still retains some value. A write-off reduces the value of an asset to zero and negates any future value.