Definition§
Worthless Securities refer to financial instruments that, due to various factors such as bankruptcy, closure, or financial instability of the issuing entity, have lost all value. These securities can no longer be sold or traded for any monetary value.
Ownership of worthless securities usually transforms into a capital loss for the investor. According to tax law, investors who own worthless securities can declare a deduction for a capital loss on their tax returns, provided they comply with the IRS regulations.
Examples§
- Company Bankruptcy: If a company issues stocks and then goes bankrupt, leaving no assets to distribute to shareholders, the stocks become worthless.
- Fraudulent Schemes: Securities purchased from companies involved in fraudulent schemes often become worthless when the fraud is discovered, and companies are shut down.
- Delisting from Stock Exchange: A security that gets delisted from the stock exchange due to non-compliance and cannot find a market elsewhere.
Frequently Asked Questions§
Q1: How do I claim a loss for worthless securities on my taxes?
A1: To claim a loss, you need to demonstrate that the securities became worthless during the tax year. You would list the securities on Form 8949 and then follow instructions on Schedule D (Form 1040) to compute and report your capital loss.
Q2: What is the deadline for claiming worthless securities as a loss?
A2: You must claim the loss for worthless securities in the tax year they became worthless. If you fail to claim it within this period, you might lose the opportunity to utilize the loss.
Q3: Can both individuals and businesses claim losses for worthless securities?
A3: Yes, both individuals and businesses can claim a capital loss on their taxes for worthless securities.
Q4: What documentation is required to prove the worthlessness of a security?
A4: Documentation may include financial records of the issuer, news reports about the company’s bankruptcy, and evidence of the failed attempts to sell the securities.
Related Terms§
Capital Loss: A decrease in the value of an investment or asset, realized when the asset is sold for less than its purchase price. Capital losses can offset capital gains for tax purposes.
Securities: Financial instruments that represent some type of financial value, including stocks, bonds, and options.
Delisting: The removal of a listed security from the stock exchange, making it unable to be publicly traded.
Online Resources§
- IRS Topic No. 409 - Capital Gains and Losses
- Investopedia - Worthless Security
- SEC - Investor Bulletin: Fraudulent and Scam Investments
Suggested Books for Further Studies§
- Finance for Dummies by Eric Tyson
- Investment Risk Management by Greg Filbeck
- Capital Investment and Financial Decisions by Haim Levy and Marshall Sarnat
Fundamentals of Worthless Securities: Securities Basics Quiz§
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