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Answer:
Dear Ms. Wilcox,
Perhaps.
There are two possibilities.
Possibility
#1: Being Worthless
If
the stock is officially "worthless," a tax break is
very likely. However, just because a stock is in bankruptcy
doesn't mean it's worthless in the eyes of the IRS.
In
order to qualify to take the so-called "worthless
stock break" the stock must meet two qualifications.
One, it can no longer be trading on any of
the exchanges, over-the-counter or in the pink sheets.
Two, it must have absolutely zero value. It
cannot be worth even one cent - if it is, the IRS
maintains it has value.
Investors
are allowed to treat a stock that has no value as
if it is a capital asset that was sold for zero on
the last business day of the year.
Although
investors are not required to spell out the details
on their tax return, I strongly recommend that you
save all documentation relating to the stock's loss
of value. That includes notices you may have received
from the company, news articles about the situation
and anything else that appears relevant. In particular,
it's important to have proof of the date the stock
became worthless -- in case you are audited. If you
don't know the date, call the company's headquarters
and ask for "Investor Relations." Even though the
firm is in bankruptcy, it's likely there will be a
skeleton staff on hand.
Then,
report the worthless stock on IRS "Schedule D" and
attach it to your 1040.
Catching
Up
Quite
often investors don't realize they have a worthless
stock until way past the time it became worthless.
If this is true for you - that you didn't claim the
loss on your return for the year the stock ceased
to hold value, the IRS is somewhat forgiving. You
can file for a credit or refund due to the loss using
Form 1040X. This form in essence amends your return
for the year involved.
Possibility
#2: Selling At A Loss
If
your stock turns out not to be officially worthless
and it's still trading, you could opt to sell your
shares at a loss. Then you can use this loss to offset
any capital gains you made during the year. This can
be done on a dollar-for-dollar basis.
Note:
If you had more capital losses than gains in 2006
(which we hope was not the case!), then your losses
can also be used to offset up to $3,000 in ordinary
income. (Ordinary income is income other than capital
gains; it includes wages; salary; any interest earned
from savings accounts, bank CDs, etc.; dividend payments
and net income from a business.) If need be, these
losses can also be carried forward into future tax
years.
If
you still have questions about the procedure, read
chapter 4 in IRS Publication #550, "Investment Income
& Expenses," available at: www.irs.gov.
(This is a useful guide for all investors to have
on hand.)
Good
luck!
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