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.

Personal Bad Debt

Empty Pockets

Photo by danielmoyle on Flickr.com

In my last post I wrote about how to write off a business bad debt on your tax return.  Today, I’m going to explain writing off a personal bad debt.  For example, say you loaned your brother-in-law $5,000 to buy a house and he never paid you back.  That’s considered to be a “non-business bad debt.”

 

The key to claiming a personal bad debt is being able to prove that you tried to get your money.  For example, I paid a boatload of money to send my son to college.  He’s not paying me back.  To be honest, I don’t expect him to – that college money was never meant to be a loan so I can’t claim a deduction for money that I was never supposed to get back in the first place.

 

If you’re claiming a personal debt, you’ll need to show that the money really was a loan, that you were supposed to receive payment, and that the payment was not and will not be received.


Evidence such as a signed loan agreement and copies of collection letters are going to be necessary.  You don’t have to take the person to court – especially if you know that even if you win the court case you won’t get your money – but you do have to show that you tried to get paid.   So, using the brother-in-law example, first you’d want a signed agreement showing that he intends to pay back the $5,000.  Your agreement should show how he’s paying it back, and when.  When he doesn’t pay you, you’ll want to send him a signed letter stating that you expect him to pay you.  You will want to send that correspondence via certified mail, return receipt requested.  This gives you evidence of trying to extract a payment from him.

 

Remember: Without some sort of evidence that the money really was a loan, and that you tried to get paid – you can’t claim the bad debt.


As far as the actual reporting goes, it gets reported as short-term capital losses on Form 8949 part 1 line 1.  (Back in the old days that would be schedule D.  It will still show up on your Schedule D when you’re done, but you’ll be inputting the information onto Form 8949.)

 

You’d write your brother-in-law’s name in column a.  You’d put $5,000 in column f (that’s your basis), and you’d enter zero in column e (because it’s worthless now since he ain’t payin’ ya.)  Make sure you check the box “C” because you’re not getting a 1099B form for this debt.

 

When you write off a personal bad debt like that, you’ll need to attach a statement to your tax return that has the following: a description of the debt, including the amount and when it became due, the name of the debtor and any business or family relationship that you have with him, the efforts that you made to collect the debt, and why you decided the debt was worthless. (For example – maybe your brother-in-law declared bankruptcy or may you know that legal action to collect the debt would probably not result in payment.)

 

Because it’s being claimed as a capital loss – you’re going to be limited to the same rules as other capital losses as far as the amount of the debt that can be used to offset your other income.  So if the loan is the only thing that’s going to wind up on your Schedule D – then you’ll only be able to claim $3000 of the loss.  The rest will carry over to the next year.

 

If you only take away one point of this blog post it should be that you must try to collect the payment before you try to claim the bad debt as a tax deduction.  If you don’t try to collect, then the IRS can treat the debt as a gift and you lose out.