Tax & regulation
How does the IRS treat worthless securities that go completely bankrupt to zero?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
When a security becomes completely worthless, the IRS generally allows the investor to treat it as a capital loss as if it were sold for zero on the last day of the tax year.
How it works
This worthless security deduction is typically reported as a long-term capital loss regardless of actual holding period in certain circumstances, and documentation of worthlessness, such as bankruptcy filings, is advisable.
An example
An investor holding shares of a company that completed liquidation in bankruptcy might claim a capital loss equal to their full cost basis for that tax year.
Risk & limitations
Determining the exact date and proof of worthlessness can be complex and contested by the IRS; consult a tax professional and retain supporting documentation. This describes U.S. federal rules only; Canadian and other non-U.S. investors are subject to different tax/regulatory regimes (e.g., CRA rules, TFSA/RRSP treatment) and should consult a local tax professional.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.