Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jan 29, 2020

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If you invest in stock that loses its value completely, it is possible to claim this loss as a tax deduction, but you must do so at the correct time and only after making sure that the stock has actually lost all technical value. For example, if the company has declared Chapter 7 bankruptcy, been liquidated and gone out of existence altogether, it will be considered worthless stock. If the company still exists even in a weakened state, and the stock has no value to you – or anyone else – it may still not be considered worthless stock by the IRS for some time into the future, so you must wait to claim the deduction in order to avoid having it rejected.

Claiming Tax Deductions for Worthless Stock or Failed Stock Investments

Typically you cannot claim a stock loss on taxes until the stock has been sold. This is why it must lose all value (according to the IRS) before you can claim it and consider it completely worthless. A stock worth just a few pennies may not have enough value for you to sell it off, yet you still can’t claim it since technically it does still have a value. This can make it hard to ever take tax deductions on such stock, since if you take them too early, they could be rejected.

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Can I Claim Tax Deductions for Stock Losses in My IRA or 401K?

It’s also important to note that any stock held in your IRA or 401(K) is not eligible for a loss deduction. Because you don’t have to pay taxes on gains in these accounts, you’re not entitled to a tax deduction for the loss.

Should I Get Legal Help?

Making a mistake on your taxes can cause you a lot of trouble. Before taking a tax deduction for a worthless security, you should consider speaking with a lawyer for advice and assistance on whether the deduction will be granted by the IRS or not.