No shareholder will want to be holding reams of stock that have lost tangible value, especially some of those dating back from the so-called “dot-com” boom which became a bust. These stocks have since degenerated into “penny stock”, for they are now worth only a penny apiece, and nobody else is willing to buy them, as they know they are useless in the long run, and if the stock market crashes, they are good as wrapping paper.
So what you do if you are stuck with “penny stocks”? What do you do especially when you are about to file your next tax return? You can sell them (even for a smaller sum) and report it as a write-off in your tax return.
- A closer look. Before you try selling the stock, consider if the corporation has been liquidated. Usually the corporation in question issues a form, called Form 1099-DIV by year’s end. This form states the liquidation distribution to the shareholder, and if you are one of those shareholders, this distribution amount, along with the original cost, can be used to compute the gain or loss.
- Each time you file your tax return, the IRS considers the progress of the portfolio as irrelevant, unless you have actually realized from gains or losses from the tax, which the IRS regards as a taxable “event”.
- Deductions allowed by the IRS can be obtained only if the stock has partial or zero value, even if each stock is for every penny. The IRS also has a $3,000 deduction limit per year on any losses, but that is halved to $1,500 if with a spouse.
- Finally, some cases will require further study and analysis, for the wrong stock and misunderstanding of IRS rules may land a day in court.
- Where to sell them? Major brokers have many services for shareholders, and some of them do have special services for those who have worthless stock, and they will buy your dirt-cheap stock for a fee, before they close the transaction. However, such transfers may not guarantee a right for loss claims, and furthermore, if the charge is over what proceed you have obtained, the stock is considered completely worthless. The brokers may also have any online information and guidelines regarding worthless stocks, but if they do not have such information, you can consult your broker by phone for special requirements and arrangements on how to deal with zero-value stocks.
- When to sell? Timing is also important in selling worthless stocks, as it is considered ideal to sell two years after holding on to the stock, yet if you get a worthless notice from the broker then the stock is a complete loss that must be taken into account.
- Expert advice. Should the rigmarole of selling worthless stock be too difficult, you can hire an accountant to help out, especially when dealing with the intricacies of Schedule D, and advising you how best to make the most of the penny stock.
A lesson learned is for you to know when to sell stocks before they become penny stock.