We were asked: "I bought a stock at $1.00 per share. It dropped to a few cents and then went off the board altogether. How can I get rid of it now, so that I can claim it on my tax return as a loss?"
Here's our answer: If the company was liquidated, you should receive a 1099-DIV form at year-end showing a liquidating distribution. Treat this as if you sold the stock for the amount of the distribution. The date of "sale" is the date that the distribution took place. Using your original cost basis in the shares, you can now compute your loss.
If the company hasn't actually been liquidated, you'll need to make sure it's totally worthless before claiming a loss. If you have worthless stock that's difficult or not worth it to sell through your broker, you can sell it to a friend (or cousin, aunt, or uncle) for pennies. (But not to a spouse, siblings, parents, grandparents, or lineal descendants.) Here's one way to do it:
1. Get the actual stock certificates from your broker.
2. Formally sell the shares to the purchaser, with a check for payment and a bill of sale.
3. Sign over the stock certificate (on its back) to the purchaser. Have the signatures verified by your banker and/or a local stockbroker.
4. Send the certificate to the stock transfer agent. Explain that the shares have been sold, and ask them to cancel the old shares and issue a new certificate to the new owner.
Some brokerages will offer you a quicker alternative, buying all your shares of the stock for a penny. They do it to help out their customers and because, over time, some of the shares may actually be worth more than the penny they paid for them.
By selling the shares, you have a closed transaction with the stock and can declare a tax loss. Your friend, relative, or broker, for a pittance, has just bought a placemat or birdcage liner.
Learn more in our Tax Center, or at the IRS website.
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