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How to Manage Your Taxes When Stock Investments Fail

September 9th

stock market taxesSince 2008, it has become a commonplace occurrence to see companies failing and stocks crashing. For many investors, the past couple years have seen substantial losses. But what does this mean for your taxes?

In most cases, if a taxpayer invests in a company that fails, the stock loss can be taken as a tax deduction. It is generally considered a ‘capital loss,’ and is therefore subject to any of the standard rules governing this area of tax law.

However, here are a few other tips to help you navigate this uncomfortable situation:

1. Worthless Securities

To qualify as a “worthless” security, shares but be actually worth nothing, not just trading for pennies on the dollar.

2. Documenting a Stock Loss

Many taxpayers suffer confusion as to how to document a stock loss of this magnitude. However, with this kind of loss, it is generally a bit simpler to manage than with other kinds of capital losses. In some cases, the brokerage will supply a letter documenting the stock’s lack of value. In other instances, the brokerage might, for a fee, buy back the stock for a nominal amount.

3. When to Claim Stock Loss

Stocks that became totally worthless during the course of the year are typically treated as having been sold on the last day of the tax year. However, if an individual neglects to claim a worthless-security loss on the appropriate return, there is still time to rectify the problem. By filing an “amended” return using IRS Form 1040X within seven years from the date the original return was due, taxpayers can rectify past oversights.

Check with a tax lawyer for more information on navigating the details of an “amended” return. It is also helpful to review IRS Publication 550, which discusses declaration of stock loss.

 
 
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