Taxes - How to file for capital losses and take tax advantage of a worthless stock

[This post is written and copyrighted by FIRE Finance (http://firefinance.blogspot.com).]

If we possess a stock which has become worthless, then we can take tax advantage of it from Uncle Sam. Kay Bell explains how we can go about doing so in her article "Taking tax advantage of a worthless stock" at Bankrate. The whole process consists of two major steps.

Step 1: An investor should have proper documentation to prove that the stock's market value has become zero, that is, it is a dead asset.

Step 2: Report the valueless stock on line 1 or line 8 of Schedule D, depending on whether it was a short or long term holding. The following part which we quote from Kay's article is very important :

"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. If you discover you didn't claim a valueless stock loss on your original tax return in the year it became worthless, you can file a claim for a credit or refund due to the loss. Just file Form 1040X to amended your return for that year. You have up to seven years from the date your original return had to be filed or two years from the date you paid the tax, whichever is later."

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