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**The information below has not been verified for the 2020 tax year as the IRS Pub. 550 has not yet been released by the IRS.**

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), on page 36:

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.

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 1040-X, 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 must generally 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.

On page 53:

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. For TaxAct, you will need to enter it on Form 1099-B Proceeds From Broker and Barter Exchange Transactions for it to automatically transfer to Form 8949 Sales and Other Dispositions of Capital Assets.

To enter the information for the worthless securities in the TaxAct® program:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Investment Income in the Federal Quick Q&A Topics menu to expand, click Gain or loss on the sale of investments to expand, then click Capital gain or loss (Form 1099-B).
  3. Click + Add Form 1099-B to create a new copy of the form or click Edit to review a form already created.
  4. Click Quick Entry to scroll down to answer all applicable questions or click Step-by-Step Guidance to proceed with the program interview questions.
  5. On the screen titled Investment Sales - Other Items, select Worthless securities, then click Continue.

Note. Capital gain or loss on the sale or trade of investment property held one year or less (short-term) is reported in Part I of Schedule D (Form 1040) Capital Gains and Losses on Lines 1-3. A capital gain or loss on the sale or trade of investment property held more than one 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.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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