Q: What do you do with the worthless stock of a liquidated company in terms of taxes?

A: If you really mean liquidated, you will receive a 1099DIV at the end of the year that shows a liquidating distribution to you (the shareholder). Treat this liquidating distribution as if you sold the stock for the amount of the distribution. The date of "sale" is the date that the distribution actually took place. Then, using your original cost basis in the shares, you can compute your gain or loss (either short-term or long-term).

Now then, if you mean that the stock is "worthless" and didn't really liquidate, the rules are a little bit different. A taxpayer can deduct a loss from worthless stock or other securities (i.e., a bond, debenture, note, certificate or other evidence of indebtedness, etc.).

Total worthlessness of the security is required for the loss deduction to be claimed. No loss deduction is allowed for partial worthlessness, or for the mere decline in the value of the security.

So you need to make sure that the stock is worthless. Many stocks that have taken major hits may still be alive, even though they are trading for pennies.

My suggestion: Rather than fight the worthless securities rules (Is it really worthless? Did it have value last year? Etc.), sell the junk for pennies to a relative other than your wife, brothers or sisters (either whole or half-blood), ancestors, or lineal descendants. (In-laws ARE fine... don't want to run afoul of the related party rules.)You then have a closed transaction, and the loss is certain. If the stock ever comes back and is worth something, at least the money is kept in the family.

- Article 31

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