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Worthless Securities: What You Need to Know About Their Legal Status
Definition & Meaning
Worthless securities refer to financial instruments, such as stocks or bonds, that have lost all their market value, effectively becoming worthless. This situation often arises when a company goes bankrupt or fails to meet its financial obligations, leading to a total loss for the investor. When securities are deemed worthless, the owner can report this loss on their tax return, potentially offsetting other capital gains.
Table of content
Legal Use & context
In legal practice, worthless securities are primarily relevant in tax law and investment regulations. Investors may need to file specific forms to claim losses associated with these securities during tax season. Understanding how to classify and report these losses can help individuals manage their tax liabilities effectively. Users can utilize legal templates provided by US Legal Forms to assist in the filing process.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
(Hypothetical example) An investor purchases shares in a company that later declares bankruptcy. After the bankruptcy, the shares are no longer traded, and their market value is zero. The investor can report this loss on their tax return for that year.
(Hypothetical example) A bond issued by a company becomes worthless when the company defaults on its debt obligations, resulting in no recovery for bondholders. The bondholder can claim a capital loss on their taxes.
Relevant laws & statutes
One key statute related to worthless securities is:
26 USCS § 165 (g): This statute states that if a capital asset becomes worthless during the taxable year, the loss is treated as a loss from the sale or exchange of that asset on the last day of the taxable year.
Comparison with related terms
Term
Definition
Worthless Securities
Securities that have lost all market value, resulting in a total loss for the investor.
Capital Loss
The loss incurred when a capital asset, such as stocks or bonds, is sold for less than its purchase price.
Non-Performing Asset
An asset that does not generate income or cash flow, but may still have some market value.
Common misunderstandings
What to do if this term applies to you
If you believe you have worthless securities, take the following steps:
Gather documentation showing the securities' current market value.
Consult the IRS guidelines on reporting capital losses.
Consider using US Legal Forms to find templates that can help you file your taxes accurately.
If your situation is complex, it may be beneficial to seek advice from a tax professional.
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