Tax Treatment for Worthless Securities and Property Disposition

When dealing with investments, many taxpayers face the challenge of what to do when their stocks, bonds, or other securities become completely worthless. The United States 🇺🇸 tax system, through the Internal Revenue Code, provides a clear framework for handling these situations. Understanding who qualifies to claim a loss for worthless securities, what documentation is needed, and how to report these losses is essential for anyone who invests in the stock market or holds securities as part of their financial portfolio. This guide explains the requirements, eligibility, and practical steps for reporting the disposition or sale of worthless securities, with a focus on making the process as clear and manageable as possible.

Who Qualifies to Claim a Loss for Worthless Securities

The rules for claiming a loss on worthless securities apply to most taxpayers who own stocks, stock rights, or bonds that are not held for sale by a securities dealer. If you are an individual investor, a trust, or an estate, you may qualify to claim a loss if your securities become completely worthless during the tax year. Securities dealers, who buy and sell securities as part of their business, have different rules and are generally not covered by these provisions.

Key points about who qualifies:

• Individual investors: Most people who buy stocks, bonds, or stock rights for personal investment can claim a loss if those securities become worthless.
• Trusts and estates: These entities can also claim losses on worthless securities if they hold investments that lose all value.
• Exclusions: Securities dealers—businesses that buy and sell securities for clients—are not covered by these rules for their inventory holdings.

Example:
Sarah, an individual investor, bought 500 shares of a small tech company in 2023. In 2025, the company went bankrupt and the shares became completely worthless. Sarah can claim a loss for the worthless securities on her 2025 tax return.

Detailed Eligibility Criteria for Worthless Securities Losses

To claim a loss for worthless securities, you must meet several specific requirements set out in the Internal Revenue Code, especially Section 165(g). Here’s what you need to know:

1. The security must be completely worthless.
A security is considered worthless if it has no remaining value at all. This means you cannot sell it, trade it, or receive anything for it. The IRS expects you to show that there is no chance the security will ever have value again.

2. The security must not be held for sale by a securities dealer.
If you are a regular investor and not a dealer, you can claim the loss. Dealers have different rules.

3. The loss must be recognized in the year the security becomes worthless.
You must claim the loss on your tax return for the year in which the security became worthless. If you miss this, you can file an amended return within a certain time frame (explained later).

4. Abandonment of securities is allowed, but strict rules apply.
If you abandon a security, you must permanently give up all rights to it and receive nothing in return. The IRS will look at all the facts to decide if your action counts as abandonment or something else, like a sale or a gift.

5. The holding period matters.
How long you held the security before it became worthless determines if your loss is short-term (one year or less) or long-term (more than one year). This affects how the loss is treated on your tax return.

6. Special rules for affiliated corporations.
If you own at least 80% of another corporation, and that corporation’s stock becomes worthless, you may be able to claim an ordinary loss instead of a capital loss. This can be more beneficial because ordinary losses can offset more types of income.

Example:
John bought bonds in a company in 2022. In 2025, the company went out of business and the bonds became worthless. John held the bonds for more than one year, so his loss is long-term.

Required Documentation for Worthless Securities

The IRS requires strong proof that your securities are truly worthless. This is because some investments may lose most of their value but are not completely worthless. To support your claim, you should gather as much evidence as possible.

Important documents include:

• Financial statements showing the company’s assets and liabilities
• Bankruptcy filings or court documents proving the company has no value left
• Notices of business closure or cessation of operations
• Correspondence from the company or its representatives confirming the loss of value
• Valuation reports from independent experts, especially for private or hard-to-value securities
• Records of attempts to sell the security with no buyers found

Tip:
Keep all documents in a safe place. The IRS may ask for proof, especially if the loss is large or the security is not widely traded.

Official IRS Forms and Resources:

• IRS Form 8949 (Sales and Other Dispositions of Capital Assets): This is the main form for reporting the disposition or sale of worthless securities. Access Form 8949 here
• Schedule D (Form 1040): This form summarizes your capital gains and losses, including those from worthless securities. Access Schedule D here
• Form 1040-X (Amended U.S. Individual Income Tax Return): Use this if you need to amend a previous year’s return to claim a loss for a security that became worthless in an earlier year. Access Form 1040-X here

Application Process Overview: Step-by-Step

Reporting a loss for worthless securities involves several steps. Here’s a clear process to follow:

1. Determine if your security is truly worthless.
Review all available evidence. If the company is bankrupt, out of business, and there is no chance of recovery, the security is likely worthless.

2. Establish your holding period.
Check when you bought the security. If you held it for more than one year, it’s a long-term loss; otherwise, it’s short-term.

3. Complete IRS Form 8949.
– Enter the name and details of the security.
– For the date sold, write “worthless.”
– Enter your cost basis (what you paid for the security).
– Check the box for a worthless security transaction.

4. Summarize the loss on Schedule D (Form 1040).
Add the information from Form 8949 to Schedule D to calculate your total capital gains and losses.

5. If you missed claiming the loss in the correct year, file Form 1040-X.
You have up to 7 years from the original due date of the return, or 2 years from the date you paid the tax, whichever is later.

6. Keep all supporting documentation.
You may need to show the IRS proof that the security was worthless.

Example:
Maria bought shares in a startup in 2021. In 2025, the company shut down and the shares became worthless. Maria fills out Form 8949, marks the shares as “worthless,” and includes the loss on Schedule D. She keeps all emails from the company and news articles about the closure as proof.

Practical Tips for Meeting Requirements

Claiming a loss for worthless securities can be straightforward if you follow these tips:

• Document everything early. As soon as you suspect a security is worthless, start collecting evidence.
• Consult a valuation expert if the security is not publicly traded or is hard to value. Their report can help prove your case to the IRS.
• Be careful with abandonment. Make sure you have truly given up all rights and received nothing in return. If you get anything, even a small amount, it may count as a sale, not abandonment.
• Check your holding period. This affects how your loss is treated and how much you can deduct each year.
• Know the deduction limits. You can deduct up to $3,000 of capital losses against ordinary income each year. Any extra loss can be carried forward to future years.
• File on time. If you miss the year the security became worthless, use Form 1040-X to amend your return within the allowed time.

Common Concerns and How to Address Them

What if the security still trades for a very low price?
If there is any market for the security, even at a very low price, it is not considered worthless. You must wait until it has no value and cannot be sold.

What if the company is in bankruptcy but not yet dissolved?
A company in bankruptcy may still have some value. Wait until the bankruptcy process is complete and it is clear there is no chance of recovery.

What if I receive something in exchange for the security?
If you get anything in return, even a small amount, it is not abandonment. You must report the transaction as a sale or exchange.

How do I prove worthlessness to the IRS?
Provide as much documentation as possible: financial statements, bankruptcy filings, expert reports, and records of failed sale attempts.

What if I own stock in an affiliated corporation?
If you own at least 80% of another company and its stock becomes worthless, you may be able to claim an ordinary loss. This can offset more types of income than a capital loss.

Background and Historical Context

The rules for worthless securities have been part of the Internal Revenue Code since 1976. The IRS has consistently required that losses be treated as if the securities were sold on the last day of the year they became worthless. Over time, court cases and IRS rulings have stressed the need for clear evidence and proper documentation.

It is important to note that accounting rules for businesses (GAAP) are different from tax rules. Under GAAP, companies may adjust the value of securities over time, but for tax purposes, a loss is only recognized when the security is completely worthless.

Recent Developments and Policy Updates

As of July 27, 2025, there have been no major changes to the rules for worthless securities. The IRS continues to require strong documentation and careful reporting. Tax professionals and valuation experts recommend early action and thorough record-keeping to avoid disputes.

For more information, the IRS provides detailed guidance in Publication 550, which covers investment income and expenses, including the treatment of worthless securities.

Conclusion and Actionable Steps

If you own stocks, bonds, or other securities that have become completely worthless, you may be able to claim a loss on your tax return. Make sure you:

• Confirm the security is truly worthless
• Gather strong documentation
• Complete IRS Form 8949 and Schedule D
• File Form 1040-X if you missed the correct year
• Keep all records in case the IRS asks for proof

As reported by VisaVerge.com, following these steps and staying organized can help you claim your loss correctly and avoid problems with the IRS. If your situation is complex, or if you are unsure about the value of your securities, consider working with a tax professional or valuation expert.

For the latest official guidance, visit the IRS Capital Gains and Losses page for up-to-date information on the disposition or sale of worthless securities and related tax rules under the Internal Revenue Code. This will help ensure you meet all requirements and make the most of your tax benefits.

Learn Today

Worthless Securities → Stocks or bonds that have no remaining market value or chance of recovery.
Holding Period → The length of time you own a security, impacting if a loss is short or long term.
Form 8949 → IRS form used to report sales and dispositions of capital assets including worthless securities.
Abandonment → Permanently giving up all rights to a security without receiving any compensation.
Affiliated Corporation → A company where you own at least 80% of stock, affecting how losses are reported.

This Article in a Nutshell

When securities become worthless, investors must understand IRS rules to claim losses accurately. Complete documentation and timely Form 8949 filing make tax reporting manageable and legal for individual investors facing investment losses.
— By VisaVerge.com