There
are at least two distinct situations that would lead to a stock being
'worthless'.
1)
Enron and Kmart still trade. However net proceeds from a small position (less
than 500 shares) usually do not exceed the brokerage commission on the trade,
and therefore there is zero credit to the investors account.
2) Defunct companies go into bankruptcy, the equity is taken out by
the secured lenders, the shares eventually get completely delisted - and some
equity holders never take the time to actually trade out their shares.
Under this scenario - see the below text that comes from the IRS.
My
suggestion is that if you hold a stock that files for chapter #11 or #7
(rarely), sell the issue immediately even though the price is probably in the
.10 to .20 range. At least you will get a 1099-B and have a documented
transaction.
Filing a claim for refund. If you do not claim a loss for
a worthless security on your original return for the year it becomes worthless,
you can file a claim for a credit or refund due to the loss. You must use Form
1040X, Amended U.S. Individual Income Tax Return, to amend your return
for the year the security became worthless. You must file it within 7 years from
the date your original return for that year had to be filed, or 2 years from the
date you paid the tax, whichever is later. (Claims not due to worthless
securities or bad debts generally must be filed within 3 years from the date a
return is filed, or 2 years from the date the tax is paid.) For more information
about filing a claim, see Publication 556, Examination of Returns, Appeal
Rights, and Claims for Refund.
-----Original Message-----
From: IraS1@aol.com
[mailto:IraS1@aol.com]
Sent: Wednesday, February 19, 2003 1:05
PM
To: club_cafe@bivio.com
Subject: Re: club_cafe: Re: How
to report bankruptcy of a stock
The
first poster in this thread may or may not be holding a worthless stock (we
don't know what company it is).
Albert St. Onge's club definitely
holds a worthless stock. You don't need any additional tax schedules to deal
with a worthless stock beyond Schedule D which is used for all stock
transactions. The correct IRS procedure is to enter "worthless" in the date
sold and sales proceeds columns, but entering a sale for $0 on 12/31
accomplishes the same thing.
Ira Smilovitz
In a message dated
02/19/03 9:45:21 AM Eastern Standard Time, juan.mostek@kellogg.com
writes:
Your broker is obligated to make a trade as long as the stock is
listed on
the BB or pink sheets. Lets say you own a 100 shares of a stock
trading at
.01. Your trade would net $1.00 less commissions. My broker
has a policy to
not charge a commission in excess of the proceeds, so
they would net the
dollar and you could then reflect the trade as a net
proceed of zero. You
can at least then claim the loss on your
taxes.
There is a way to take a loss in the event you do not make the
trade and the
equity becomes worthless (no market available). You need to
contact a tax
advisor in this situation as it entails additional tax
schedules.