Bottom line: you're better off to officially close a position instead of just saying it's worthless - that's where the pink sheets are helpful !!!!
But what if your shares of a corporation dropped off the stock-market radar before you were able to unload them? You might be able to write off the holding on your tax return as a worthless stock.
Worthless means zero value
Before you can use this tax break, the stock must be totally worthless.
Just because a company is in bankruptcy, or its stock isn't trading, doesn't necessarily mean it's worthless. If it's worth even a few pennies, it still has value in the eyes of the Internal Revenue Service.
If you truly do have a dead stock in your portfolio, you treat it on your tax return as if it were a capital asset you sold for zero dollars on the last day of the tax year.
Documentation for the IRS
When you report a worthless-stock transaction........be prepared to show:
There is no hope investors will ever get anything for their holdings. This isn't always easy, so do your homework.
When the security became worthless. You must reasonably determine the date the stock lost all its value.
Once you're armed with that information, it's time to report your loss.
Filling out the form
Report the valueless stock on line 1 of Part I or line 3 of Part II of Form 8949, depending on whether it was a short-term or long-term holding. If an asset became worthless during the tax year, it is treated as though it were sold on the last day of the year. That could affect whether your capital loss is a short- or long-term one.
Your worthless stock losses, either short-term or long-term, can offset capital gains dollar for dollar. If you have more in capital losses than gains, then your loss can offset ordinary income up to $3,000. Additional losses can be carried forward to future tax years.
Generally the shares are traded on the pink sheets for a long time after a company goes BK(no guarantee) - - - there are brokers that specifically do this - - as long as they make fees for trading they're happy - you get to close out a position for tax purposes - they make a fee - - - IRS has a closed position - - - - everybody happy
Several years ago I has several thousand shares of MCLD when they went BK - - I can't remember the exact figures but I sold several thousand shares for 10 bucks and the fees were a hundred - - - but I had a finalized transaction.
No one would stick around for the shares to disappear. First it will be halted. Then trading will resume. Once it goes under $1 it will be delisted from the Nasdaq and still trade on the pink sheets with a new ticker. By then it will be 10 cents but most shorts will have covered before then. People will continue to trade it hoping for an irrational spike. Years ago I bought WorldCom for 6 cents, in 2 days it spike to 35 cents and I got out at 20 when it came crashing back down. It was a gamble. At this point long or short is a gamble on this stock. American Airlines was at $6 the day the FTC blocked the merger with USAIR, it crashed to $2 in 2 days. Now its $6 again. So who knows.
People will continue to trade it hoping for an irrational spike.
Funny you should mention that - - - The company I talked about getting caught in a BK, well - you can no longer link to the site but a few of the old stock holders(4-5) that had the direct URL kept posting for years about how the stock was going to come back and the company would return blah blah etc.