The current Pandemic and Worthless Securities
The economic effects of the worldwide spread of COVID-19 continue to harm many different businesses and industries. As a result of this business loss across many sectors (especially travel-related and retail), it is essential to keep an eye on the most significant declining stocks in an individual’s portfolio. Many companies are currently faced with tough decisions and are wondering about their survival. If companies are forced into contemplating bankruptcy due to the COVID-19 challenges, you very well may soon have worthless stock.
Generally, if a public company declares chapter 7 bankruptcy, they routinely cancel their common stock on a specific date. At times, the canceling of the common stock may not be enough to declare it truly worthless as liquidation events could follow.
You should advise your tax consultant on any situations regarding worthless securities.
The best practice for a worthless stock is to sell it before it reaches any stage of worthlessness, so there is no worry or debate in figuring out if it is genuinely worthless—this why I mentioned in the first paragraph to keep an eye on the underperformers in a portfolio.
Here is some additional info from the Frequently Asked Questions page on irs.gov:
I own stock that became worthless last year. Is this a bad debt? How do I report my loss?
If you own securities, including stocks, and they become totally worthless, you have a capital loss but not a deduction for bad debt. Worthless securities also include securities that you abandon. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it.
- Treat worthless securities as though they were capital assets sold or exchanged on the last day of the tax year.
- You must determine the holding period to determine if the capital loss is short term (one year or less) or long term (more than one year).
- Report worthless securities on Form 8949, Part I or Part II, whichever applies. Indicate as a worthless security deduction by writing Worthless in the applicable column of Form 8949.
J. Bradford Lidstone Jr.
Senior Vice President / Director of Operations
The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only. FSTC does not offer tax or legal advice, professional counsel should be sought for tax or legal advice.