Describe the usual tax consequences that apply to a worthless security.

A.

The taxpayer must first establish when the security actually became worthless. Oncedetermined, the loss incurred is treated as a loss from the sale of a capital asset on the last day of the taxable year. Under certain circumstances, if a domestic corporation holds worthless securities in an affiliated corporation, the loss to the domestic corporation is treated as having arisen from a sale of a noncapital asset, making the loss an ordinary loss.

B.

The taxpayer may deduct the loss for securities in the year the corporation claims bankruptcy. The loss incurred by the taxpayer is treated as a loss from the sale of a noncapital asset, making the loss an ordinary loss. Under certain circumstances, if a taxpayer takes the loss in a year prior to the year the bankruptcy of the domestic corporation occurs, the loss will be considered the sale of a capital asset on the last day of the taxable year, making the loss a capital loss.

C.

A security can only be considered worthless if the IRS rules establish the stock worthless. Any domestic corporation that has a stock value of under $1 for over a year is considered a nominal amount and can establish that the stock is worthless. A taxpayer can take an ordinary loss once the domestic corporation stock meets the IRS requirements, so the taxpayer does not need to prove the security is completely worthless.

D.

A security is considered worthless at any point after the domestic corporation claims bankruptcy. If the taxpayer sells the stock prior to the date of bankruptcy or the day of, the stock is treated as a loss from the sale of a capital asset on the day of sale. The stock is considered an ordinary loss for any date after the date of bankruptcy.