Worthless Securities

Securities that you give up are likewise considered worthless securities. A security must be abandoned in order for you to completely give up all ownership rights to it and receive nothing in return. As if they were capital assets sold or exchanged on the last day of the tax year, treat worthless securities as such.

Understanding Worthless Securities

The number of outstanding shares of a publicly listed firm multiplied by the current share price results in the market value of the company, sometimes referred to as market capitalization. A comparable company study or an evaluation of discounted cash flows are two examples of valuation techniques for private companies. Securities with no market value, as mentioned above, will be worthless..

A security must not only have no value but also no chance of gaining value in order to lose all of its value. For instance, if market fluctuations are significant enough, a company's shares may lose all of their value. If there is a chance that the company could grow its market share, the shares wouldn't be worthless. Yet, if the business went out of business following bankruptcy, its shares would probably be worthless.

Worthless Stocks Vs. Penny Stocks

Penny stocks often have market prices of less than $5, whereas worthless stocks have a market value of $0. Penny stocks, however, have the potential to lose all of their value. Penny stocks often trade outside of the major market exchanges (via the OTC Markets Group and pink sheets) at a relatively cheap price ($5 or less) due to their low market value. Due to their low liquidity, wide bid-ask spreads, tiny capitalizations, and minimal followings and disclosures, these companies are regarded as being very speculative and high risk.

These are a few instances of penny stocks:

  1. Wrap Technologies, Inc. (WRAP)
  2. LiqTech International, Inc. (LIQT)
  3. Smith Micro Software, Inc. (SMSI)
  4. Red Cat Holdings, Inc. (RCAT)
  5. VIA optronics AG (VIAO)
  6. National CineMedia, Inc. (NCMI)

How To Report Worthless Securities?

There is no bad debt deduction when you own securities, including stocks, and they entirely lose all of their value. You can also relinquish securities, which are worthless. You must completely give up all of your ownership rights in a security in order to abandon it, and you can't get anything in return.

Consider worthless securities to have been sold or exchanged for capital assets on the last day of the tax year.

To determine whether a capital loss is short-term (lasting less than a year) or long-term, you must calculate the holding duration (more than one year).

Use the proper code for the worthless security deduction in the relevant column of Form 8949 when reporting worthless securities on Part I or Part II.

Key Highlights

  • Worthless securities are stocks, bonds, and other investments that have no market value; they can be bought or sold publicly or privately.
  • The IRS advises investors to treat worthless securities as capital assets that have been sold or exchanged on the last day of the tax year when calculating their accounting for them.
  • So, when the investor files their taxes, these securities may be written off as a capital loss; the holding time determines whether the loss is short-term or long-term.
  • Although having a relatively low market value, penny stocks are not regarded as worthless, even though they have the potential to become so.
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