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Below is information regarding worthless securities as it relates to filing your Federal tax return.

Per IRS Publication 550 Investment Income and Expenses (Including Capital Gains and Losses):

Page 38: Worthless Securities
Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. This affects whether your capital loss is long-term or short-term. See Holding Period, later.

Worthless securities also include securities that you abandon after March 12, 2008. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift.

If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Do not deduct them in the year the stock became worthless.

How to report loss. Report worthless securities on Form 8949, Part I or Part II, whichever applies.

CAUTION! Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. See Form 8949 and the Instructions for Form 8949.

Filing a claim for refund. If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. You must use Form 1040X, Amended U.S. Individual Income Tax Return, to amend your return for the year the security became worthless. You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later.) For more information about filing a claim, see Pub. 556.
Page 54: Holding Period
If you sold or traded investment property, you must determine your holding period for the property. Your holding period determines whether any capital gain or loss was a short-term or a long-term capital gain or loss.

Long-term or short-term. If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss.

To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.

To enter the information for the worthless securities in the TaxAct® program, enter it on Form 1099-B to automatically transfer to Form 8949: 
  1. From within your TaxAct return (Online or Desktop), click on the Federal tab. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
  2. Click Investment Income to expand the category and then click Gain or loss on sale of investments
  3. Click Capital gain or loss (Form 1099-B)
  4. Click Add to create a new copy of the form or click Review to review a form already created 
  5. The program will proceed with the interview questions for you to enter or review the appropriate information
  6. On the screen titled Investment Sales - Other Items select Worthless securities
  7. Click Continue to proceed with the interview questions

Note: Capital gain or loss on the sale or trade of investment property held 1 year or less (short-term) is reported in Part I of Schedule D on Lines 1-3. A capital gain or loss on the sale or trade of investment property held more than 1 year (long-term) is reported in Part II of Schedule D on Lines 8-10. Based on your entries in the program, TaxAct will automatically transfer the information to the correct line.

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