Worthless Stock

Every once in a while, even the most astute investor comes up with, as they say, a cropper. Once a stock investment is worthless, you are allowed to write it off (almost all the time it will be a long time capital loss). There are however some nuances – particularly revolving around when you are allowed to write off worthless stock. The easiest way of course is to sell it – some brokerage houses will simply zero out the stock for you and indicate it as if it were a sale. That’s the easy way, you have established a closing of the stock transaction.

However, there are times when you cannot sell the stock, or perhaps you don’t want to. The basic rule for when to write off a stock (or basically any investment) as being worthless – and therefore you take a loss to the extent of your cost/investment, it now being worth zero – is when it can be determined that the investment is actually worthless. If it’s still worth something, you cannot write it off – you need to sell it in order to complete a transaction for purposes of taking a loss. You need to establish that it is indeed worthless. This can be an exotic and complex area – but the common acknowledgment of worthlessness is, for instance, the company goes bankrupt. 

Or, you’ve got an investment in a privately-held company, there’s no market for it, and there’s no formal filing of bankruptcy. It simply kind of fades away (sort of like old Generals). You need to make efforts to establish that you tried to collect, you tried to locate the company or whoever is responsible, etc. – but you failed. The burden is on you, and while usually it’s not a problem, depending on the magnitude of what’s involved, it can become an issue.