Can I Write Off an Investment in an Insolvent Company?

by Herb Kirchhoff

If you bought stock or bonds that are worthless because the company became insolvent and went bankrupt, you might be able to deduct your investment loss. In general, you can claim the capital loss in the year your securities became worthless. You claim your loss on Schedule D of your tax form.

Loss Deduction

You can claim up to $3,000 per year in capital losses. If your capital losses exceed the $3,000 limit, you can carry over the excess losses to future tax years until you have used up all of the loss. For instance, if you lost $7,000 on an insolvent company, you can deduct $3,000 in the year the securities became worthless, another $3,000 the following year and the remaining $1,000 the year after that.

Basis for Claim

You must relinquish title to your securities through abandonment or sale in order to claim a capital loss deduction. If you abandon your securities, you can deduct 100 percent of what you paid to buy them up to the annual limit on capital loss deductions. There is a speculative market for securities of bankrupt companies, so if you manage to recoup some of your investment through a sale, your loss deduction will be equal to the difference between what you paid for the securities and what you received from their sale.

Long and Short

If you had capital gains from sale of other assets, you must first deduct your capital losses from your capital gains. If total capital losses exceed total capital gains, or if you had no capital gains, you can then deduct your capital losses from ordinary income. When deducting capital losses from capital gains, deduct short-term losses on securities held for one year or less from short-term gains. You deduct long-term losses on securities held longer than one year from long-term gains. If short-term losses exceed short-term gains, deduct the excess from long-term gains. If long-term losses exceed long-term gains, deduct the excess from short-term gains.

Delayed Filing

If you didn’t file for a capital loss deduction in the year securities from the insolvent company became worthless, you can still get a tax benefit for the loss by filing an amended tax return for that year. You must file your amended return within seven years of the year your investment in the insolvent company became worthless. You will get a refund or credit for any taxes you had to pay because you failed to timely claim your loss deduction.

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