Tax loss

[lyubovsalik]

• “If I sell a stock now at a big loss (down about 70–75%, around $4,000 lost from my $5,500 investment), versus holding through a bankruptcy restructuring where I’d only get a tiny payout (maybe 2–3% of current value, less than $100, and my shares would be heavily diluted), how is the loss treated for tax purposes? Can I claim the loss based on my original purchase cost, or only after the dilution/restructuring? And which option is usually better to minimize losses?

[Terri Lynn]

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: 

• Capital Gains and Losses 
• Tax Loss Harvesting 
• Losses (homes, stocks, other property) 

Please feel free to reach out with any additional questions or concerns you may have and thank you for attending!  Please have an amazing rest of your day!

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[Mike9241]

it boils down to getting about $1,500 and you get to take a capital loss of about $4000 now or get $100 later + the value of the stock which if not worthless, any decline in value would not be currently deductible. if worthless then it's $1500 now vs $100 later and the tax savings on the capital loss of about $4000 now vs $5400 later.

however, you have to consider the possibility that if you get stock in the restructuring, if it does well you could recoup the entire value though that's likely to be years in the future.