When a stock loses most of its value, you may face two options: sell now or hold through a bankruptcy restructuring. This decision can significantly impact your tax situation.
Sell vs. Hold During a Stock Loss:
Selling the Stock Now
- Sell the stock for its current value (e.g., $1,500).
Your capital loss = original cost basis - sale price.
- Example: $5,500 (original cost) - $1,500 (current value) = $4,000 capital loss.
- Claim this loss immediately on your current year tax return.
Holding Through Bankruptcy:
- Outcome depends on the stock becoming "officially worthless."
- The IRS allows capital losses for worthless securities, but the timing of this is often delayed. This means you can only claim the loss in the tax year, the stock becomes worthless.
- If the stock retains even a tiny value after restructuring, it may not be considered worthless, delaying your ability to claim the loss.
- You may only receive a small payout after restructuring.
How you would use the capital loss, if you choose to sell now:
- First, your capital loss offsets any capital gains from other investments this year.
- Reduces taxes owed on profitable trades.
- Deduction from Ordinary Income:
- If you have no capital gains, you can use up to $3,000 of the loss to reduce your ordinary taxable income (e.g., from wages or other income). This lowers your overall taxable income, reducing your tax liability.
- Remaining losses (beyond $3,000) will be carried forward to future tax years.
- For example: $4,000 loss - $3,000 (current year deduction) = $1,000 carryover. and that $1,000 would be used to offset future gains or reduce future income taxes.
For more information see:
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Please feel free to reach out with any additional questions and
thank you so much for attending!
Please have an amazing rest of your day!
Terri H.
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