Criteria for determining worthlessness of stock

stock_market_dropIRC Code Section 165 (f) and (g) allow for a losses on the sales of capital assets and losses on worthless securities.  The determination of worthlessness is based upon facts and circumstances. To be considered a loss from worthless stock the loss must be evidenced by a “closed and completed transactions, fixed by identifiable events, and… actually sustained during the taxable year”.

Criteria for determining worthlessness:

  1. Value at the beginning of the year: This determines in what year the stock became worthless.  To write off in the current year (i.e., 2015) there must be evidence to demonstrate that there was some value (actual or potential) at the end of the preceding year (i.e., 2014). Obviously, if there was no value at the beginning of the year it would mean that the stock became worthless prior to 2015 and you would need to determine in what year it did lose its value and possibly amend prior year returns to report the loss.
  1. No value at the end of the year: In order to take the loss in 2015, the stock must have become worthless during the year.  The determination of worthlessness must be established by an identifiable event (i.e., insolvency, bankruptcy, relinquishing ownership interest, cease of operations, etc.)

In addition to an “established identifiable event”, and even if there is no liquidated value, the stock must also have no potential value. Potential value is defined as reasonable hope that a reasonable investor, not an ‘incorrigible optimist’ would have.

For more information, contact a ShindelRock tax professional today.