Reporting Worthless Stock on Your Tax Return

Losing money in the stock market is frustrating.  Remember to take advantage of those losses on your tax return.

Losing money in the stock market is frustrating. Remember to take advantage of those losses on your tax return.

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Did you own stock in a company that’s now worthless?  For Example:  In 2013, Kodak’s old stock was cancelled when the company emerged from bankruptcy.  If you owned the old Kodak stock; it’s worthless now.  So how do you claim that loss on your tax return?

 

You’re going to report it as a sale of stock on form 8949.  Here’s a link to that form:  http://www.irs.gov/pub/irs-pdf/f8949.pdf The 8949 form flows through to something call the Schedule D which will then flow through to your regular 1040 tax return.  Tax software should handle it for you, but if you’re still doing returns by hand, remember you’ll need to send both the 8949 and the Schedule D in with your tax return.

 

For the sale date, you’re going to put 12/31/2013.  Under Proceeds, you’re going to put $0.  You’ll fill in the other boxes with the name of the stock, how many shares you owned and what your basis in the stock was.  Basis is what you paid for it, plus any commission fees that you may have paid to the broker.  (For what it’s worth, Kodak emerged from bankruptcy on September 3, 2013.  Tax preparers usually don’t have access to that information when preparing a return with worthless stock on it, that’s why 12/31 is generally used as the sale date.  If you know the actual date your stock became worthless, you may use it, but don’t let it keep you from preparing your return.)

 

Because stock became worthless, you’re going to have a capital loss.  You’ll use that loss to offset other capital gains.  If you have no other gains, you can use up to $3,000 of loss to offset your other income.   If you have more than $3,000 of loss, you can carry forward the excess losses and keep using them until they run out.

 

It’s important to know the difference between worthless stock and nearly worthless stock.   In Kodak’s case, once they filed for bankruptcy back in 2012 the shares had very little value.  You can’t write off “nearly worthless” stock unless you actually sell it.  (Which isn’t easy to do.)

 

Once the company emerges from bankruptcy, the stock in question is cancelled and you can write off the loss.

Last Minute Tax Tip: Donating Stock to Charity

You can avoid capital gains taxes by donating appreciated stock to charity.

Sometimes the best strategy for a charitable donation is to donate stock.

December is always the big  push time for charitable donations.  If you’ve ever thought about donating your stock holdings instead of plain cash, here are some things you should know.

First, if you have stock that has appreciated in value, you want to give the charity the stock and let them sell it for cash, instead of you selling it and giving them cash.  The reason is because you get to claim the charitable deduction for the fair market value of the stock you gave away, but you don’t have to pay any capital gains tax on the increase.  You have a win/win/win situation.  (No capital gains, plus charitable deduction, plus the charity gets stock they can sell for cash=win/win/win.)

Second, if you have stock that has gone down in value, you want to sell it first and then give the cash to the charity.  This is exactly the revese of the above.  By selling stock that’s gone down in value, you get to claim a capital loss which can offset you capital gains or up to $3,000 of your ordinary income.  Once again you have a win/win/win situation.  (Claim loss against income, get charitable deduction, plus charity gets cash.)

Although December 30 and 31 are the highest giving days for charity donations, you need to do this a little earlier in the month so that your brokerage has time to do all the transactions.  Make sure you have some wiggle room for your stock transactions to actually close and get it all done before Christmas.  Earlier if possible.

Bottom line:  stock goes up — give it directly to charity, stock goes down — sell first then give money to charity.  It’s that easy.