How to write off a worthless stock

Written by jeremy fisk
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How to write off a worthless stock
A plummeting investment may reduce the amount you owe in taxes. (Photodisc/Photodisc/Getty Images)

If one of the stocks in your portfolio has tanked and you don't expect it to recover, there's a small silver lining to help relieve the financial pain. Sale of a stock at a loss can offset your other capital gains, and the Internal Revenue Service allows taxpayers to deduct net capital losses to offset ordinary income. This effectively grants a tax break to investors who sell enough stock at a loss.

Skill level:

Things you need

  • Schedule D, Capital Gains and Losses tax form
  • Form 1040

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  1. 1

    Find poor-performing stocks in your portfolio. Decide whether accepting a loss as a tax write-off is a more attractive option than holding onto the stocks in hopes they recover.

  2. 2

    Sell losing stocks that are better used as tax offsets than investments.

  3. 3

    Determine your short-term and long-term capital gains and losses. The IRS considers any investment held for a year or less a short-term loss, and any investment held for more than a year a long-term loss. Start counting on the day after you bought the stock, and include the day you sold it.

  4. 4

    Calculate your net capital gain or loss for the year. Subtract your short-term capital loss and any carryover long-term capital loss from the previous year from your long-term capital gains. If the total is negative, you have a net capital loss.

  5. 5

    Deduct any net capital loss on your tax return. This loss can be used to reduce your regular income by up to £1,950, or £975 for spouses filing separately.

  6. 6

    Fill out a Schedule D: Capital Gains and Losses worksheet. Attach the Schedule D to your Form 1040 when filing your taxes.

  7. 7

    Carry over additional capital losses beyond £1,950 into the next year as a potential further offset.

Tips and warnings

  • Specify the precise shares you intend to sell at a loss to maximise the tax benefit. If you do not specify, the government assumes you sell the share you bought earliest first.
  • Capital losses only apply to investments. Property owned for personal use and sold at a loss, such as a car, does not count as a capital loss.
  • You can still express an optimistic investment view even if you sell a certain stock at a loss for tax purposes by buying shares in a similar company or an exchange-traded fund that tracks the sector.
  • There's no limit on the amount of losses that carry over into the next year, and you can keep carrying over capital losses year after year, benefiting from a large loss over a long period.
  • Making investment decisions based solely on tax concerns can prove costly. Consult with a financial adviser before making any investment decisions.

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