How to file a Capital Gains loss

You claim this loss by filing Schedule D with your taxes. The investment will be in the cost/basis column and $0 would be in the Proceeds column.

If the loss is less than $3000 you are done. It flows through to form 1040.

If the loss were more than $3000 and you have no other capital gains, then you would be able to deduct $3000 / year until you use up the loss, which will entail a bit more recordkeeping.

Keep the letter in case the IRS asks any questions about the $0 valuation. Send it if they ask.

Since you were not a MA resident in December 2015 when the company became worthless, it has no effect. In CA, the loss would flow through from the federal tax return numbers.

Schedule D no longer contains the details of the disposition of the shares. The actual disposition is recorded on Part II of Form 8949 as a Code F transaction. The totals on the 8949 flow to the Schedule D.

From the state income tax point of view, the loss is considered an intangible and it flows to the state that you were a resident of on the day that the shares became worthless. The OP said he received a letter from the company but did not tell us what it said about when the shares became worthless.

Actually, I disagree. The shares become worthless at the end of the tax year including the qualifying event, rather than at the actual time of the qualifying event. It still could have been worthless in 2014, though.

-- Arthur Rubin CRTP, AFSP in Brea, CA

What is the Sales Date? The date of the letter, the date when the company went bankrupt?

The "sales" date is December 31 of the year when the shares were determined to be worthless. This is not necessarily the year when the company filed for bankruptcy.

Ira Smilovitz

You are correct. I had thought CA modified IRC Sec. 165 for worthless securities... but I was wrong. It conforms to the last day of the year rule.

Actually, I disagree. The shares become worthless at the end of the tax year including the qualifying event, rather than at the actual time of the qualifying event. It still could have been worthless in 2014, though. =============== In the case of a simple insolvency (abandonment of a security), I agree with the date above.

However, if the company was forced into bankruptcy, then the date of worthlessness is the date the bankruptcy judge declared the shares worthless. This is because one has a specific cancellation of the shares, and it is not the market value (or lack thereof) that deems it worthless. Often, shares have a value immediately before cancellation.

Note that worthless securities have a 7 year period of limitations in which to file (or amend) the loss.

Note also that this appears to be a small company with more than 5 year of ownership - See "Section 1244." That may provide some relief from the net capital loss limit of $3k/year.

Also note that if you previously recognized income under AMT for employee-options on the stock now cancelled, you might have an AMT-loss that's not recognized for the regular income tax.

The letter is dated December 8 2015.

In a nutshell it states, "dear shareholder, on or about October 29, 2015, the board unanimously approved the sale of all assets ... Unfortunately the sale did not provide sufficient liquidity to pay all liabilities ...... the equity holders are out of money ..... I believe the loss is 2015"

Anyway, thanks for all your answers and help. It is much appreciated. I will follow the advice here.