Holding a Worthless Stock? They Might Not be Completely Worthless Yet!

One of my favorite things to do when working with new clients is reviewing their existing portfolios. Every portfolio tells a story—sometimes there’s thoughtful strategy behind the holdings, and sometimes… let’s just say, not so much. Yes, I'm talking about those portoflios stuffed with tons of individual stocks to make things more complicated than they need to be. Now, if you happen to be in some of those Separately Managed Account (SMA) stock strategies that hold hundres of stocks, chances are you’ve ended up or ending up with one or two worthless securities. Or, you've followed the trend and bought one of those hot companies that soared briefly and quickly went under.

So what happens when a stock becomes worthless? How do you even know?

Usually, the ticker symbol disappears and gets replaced by a strange alphanumeric code. The market value might show as zero or a dash. Sometimes the company has quietly been delisted. But here’s the thing most people miss: your brokerage firm won’t report the loss on your 1099-B, if a security has become worthless.

Why not? Because the 1099-B only reflects transactions where an actual sale occurred. If your worthless stock was never sold, just sitting there like a fossil in your account, it won’t show up on the form.

But here’s the good news: the IRS allows you to claim a capital loss for a stock that becomes completely worthless, treating it as if you sold it for $0 on December 31st of the year it went under.

Why You Should Care About the Loss

I've worked with clients who just don't like talking about losses. Some people don’t even like to think about them. But if the loss is already there, it’s a blessing! A realized capital loss can be used to offset gains elsewhere in your portfolio—either this year or in future years.

For example, maybe one day you’ll sell a home that has appreciated significantly, beyond the $500,000 capital gains exclusion for couples. Wouldn’t it be nice to have some carryover losses from earlier years to reduce that tax bill? Or maybe years later, you’ll need to withdraw from your portfolio for a vacation to Bora Bora and you've accumulated a decent amount of gains on everything you are holding. That losses from your worthless old stock might just be able to help you in time to shrink your gains.

How to Claim the Loss

Because your brokerage won’t report it, you’ll need to manually report the “sale” on your tax return:

• Use Form 8949 and Schedule D

• Enter your original purchase date and cost basis

• Enter $0 as your proceeds

• Use 12/31 of the year it became worthless as your sale date

• Check the box indicating that this was a transaction not reported on Form 1099-B

• Include a brief description like “XYZ Corp — Worthless security”

  
  

But What If the Stock Became Worthless Years Ago?

Here’s where it gets tricky. You can only claim the loss in the year the stock actually became worthless. If that year has already passed, you’ll need to amend a prior tax return—and the IRS has a time limit on that.

Generally, you can amend a return within:

• 3 years from the original filing date, or

• 2 years from the date you paid the tax (whichever is later)

So if your stock became worthless in 2021, and you filed on time, the deadline to amend would likely be April 15, 2025. After that, the window typically closes, and sorry the loss became worthless too!

What About Forgotten Paper Stocks?

Believe it or not, I've seen a lot of paper stocks over the years. They do exist! Sometimes clients dig through old files and discover paper stock certificates they completely forgot about. It’s always exciting when they turn out to be worth something. Sometimes, those companies have gone bankrupt and no longer exist.

If the company did go under years ago and the stock is now worthless, you’ll need to follow the same rules: determine when it became worthless, and if it’s still within the window to claim the loss, either on your current return or through an amended one.

Bottom line: don’t ignore that worthless stock. With a little bit attention and work, it might turn into a valuable tax benefit! If you’re not sure what to do or need help navigating this, feel free to reach out—I’m always happy to help you uncover hidden value in forgotten places.