Subject: Trading - Selling Worthless Shares

Last-Revised: 26 May 1999
Contributed-By: Art Kamlet (artkamlet at aol.com), Chris Lott (contact me)

If you hold shares that have become worthless, maybe because the company has ceased operations, you are probably interested in deducting the full cost basis of that position when you do your taxes. And, since you're already in the hole, you probably want to do this without throwing any more money away. This article discusses ways you can prove to the IRS that the shares really are worthless.

The simplest and best way to close out any position, of course, is to sell it, even if you only get a dollar. But who is going to pay you even a lousy buck for worthless shares?

If you hold the share certificates, you can probably convince one of your friends or (deep breath) relatives to buy them from you for $1. (You can give back the $1, buy the proud new owner a drink, etc.) Then list the $1 as your selling price on your tax form. If your friend really wants to take official possession of the shares, he or she must send in the properly signed share certificates to the stock transfer agent, but of course if the company really is gone, the transfer agent is not going to do anything (no money, no work).

If your broker holds the shares (the shares are held "in street name"), selling them to a friend isn't such a good deal because taking delivery of the certificates will cost you about $25 (depending

on the brokerage house, of course). And you sure don't want to pay a brokerage commission to get rid of your worthless shares. Many brokers have a plan to let their good customers sell them worthless stock for $1 or 1c for the lot. If you are a good customer, and stock is with the broker, ask. You should be able to negotiate some solution that will be satisfactory to both sides.

If for whatever reason you cannot sell the worthless shares, then you will need to obtain documentation that will convince the IRS that the stock really, truly had no value at some point in time, and close the position at that same time. This will relieve you of the burden of selling the shares. It's very important that you can demonstrate beyond a doubt the year that the shares became worthless. When you do your taxes, you would write "12/31" as the date of sale and "worthless" (or 0) as the sales price. For example, if the company has delisted the shares or closed down completely, a letter from your broker or even a letter from the company might be sufficient to establish the year in which the shares became worthless.

Interestingly, if you had shares that became worthless, and you declared them worthless, took the loss, yet hung on to the shares, you're OK if they later regain value. The IRS now anticipates that a stock you kept while declaring it to be worthless later rises from the dead. In that case, no need to amend, but use the worthless date as the acquisition date and 0 as the cost basis. So in this regard they are pretty lenient.

Note that if a company's stock goes worthless, you should declare this event in the year it becomes worthless. If you have to file an amended return (1040X) later, you have 7 years to do so, unlike 3 years for most other 1040X filings.

As you can see, it's far simpler to sell the shares for a pittance than to demonstrate that they are worthless, so that's probably the way to go if you can manage it. Although this does not establish the year in which the shares became worthless, it does give you a clear sale at a very low price, and that's always simple to explain.

One last caveat. Don't confuse a bankrupt company with a completely defunct company. Many companies continue operating while in bankruptcy proceedings, and their stock continues to trade. So the stock by definition is not worthless. In the newspaper listings, the prefix 'vj' is often used to indicate such companies. For example, when this article was first drafted, vjRAYtc (Raytech) closed at 4/38. However, a bankrupt company does not always have a low share price. About 25 years ago John Manville Co. was hit with asbestos lawsuits, and filed for bankruptcy to protect them against these suits. Except for the potential liabilities of the law suits, they had an enormously healthy balance sheet and their stock continued to trade high. More recently, about 1991 Columbia Gas of Ohio filed for bankruptcy to get out of some unfortunate long-term contracts they had written for natural gas purchases. Their stock continued to trade, generally in the $30 range, until they finally emerged with a favorable court ruling.

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