Must I recognize the loss from the sale of worthless stock in the year of the sale?

I purchased stock that is almost worthless today. I am currently unemployed. I would like to maximize the tax write-off benefit by waiting until next year to recognize this loss, when I will hopefully be employed again. If I were to sell the stock this year, would I have to recognize the loss in the same tax year? If I let the stock go worthless, when does the loss need to be recognized?

First, I should point out that if you sell a security, you must recognize the loss in the year you sell it. But, in your case, you may not be able to do this because it sounds like you don't have any income to offset the loss with. In cases like this, you will be forced to carry over any loss over $3,000. This will allow you to carry the loss over.

Worthless securities are a different matter. If you hold stocks or bonds issued with coupons or in registered form that become worthless, you can deduct your investment. Worthless securities are treated as becoming worthless on the last day of the year in which they actually become worthless. This date governs whether the loss is treated as a short-term loss (if you held the security no more than 1 year prior to December 31) or a long-term loss (if you held the security more than 1 year prior to December 31).

The loss is treated as a capital loss (discussed earlier in this chapter), even though there is no sale involved. However, if the loss relates to Section 1244 stock (discussed later in this chapter), the loss is treated as an ordinary loss up to $50,000 ($100,000 on a joint return).

There are two conditions for writing off your investment in worthless securities:

• The security must have had some value at the end of the prior year.
• The security must have become totally worthless.

To claim a loss, you must show that the stock or bond had some value on December 31 of that year. Generally, you can learn whether the stock has any value by checking your year-end statements from brokerage firms holding your stock. If you hold publicly traded stock in your own name (rather than in the brokerage firm's name or "street name"), check newspapers for December 31 to see if the stock is listed in the financial section (only stock with a value is listed in the papers).

The stock or bond must have no value by the end of the year in which you claim the loss. Just because a bond has stopped paying interest or a stock has been delisted does not mean it is totally worthless. Be prepared to present facts showing the security is worthless. You can assume that it is worthless if the company issuing it:

• Goes into bankruptcy that results in a liquidation of the company.
• Ceases to do business.
• Becomes insolvent.

However, don't assume that a security is worthless if the company has plans to reorganize in bankruptcy.