What Are Worthless Securities?

Worthless securities have a market value of zero and, along with any securities that an investor has abandoned, result in a capital loss for the owner. They can be claimed as such when filing taxes.

Key Takeaways

  • Worthless securities are stocks, bonds, or other holdings that have no market value; they can be publicly-traded or held privately.
  • The IRS recommends investors account for worthless securities as if they were capital assets that had been dumped or exchanged on the last day of the tax year.
  • As such, these securities can be claimed as a capital loss when the investor files their taxes; the holding period determines whether the loss is short-term or long-term.
  • Penny stocks have comparatively little market value but are not considered worthless, though they have the potential to become just that.

Understanding Worthless Securities

Worthless securities can include stocks or bonds that are either publicly traded or privately held. To declare a capital loss from worthless securities, the Internal Revenue Service (IRS) suggests investors treat them as if they were capital assets sold or exchanged on the final day of the tax year. As with other securities, investors must first figure out the holding period to determine if the capital loss is short-term (one year or less) or long-term (greater than one year).

In the case of a short-term loss, investors must report this on Part I of Schedule D. Investors can net short-term gains and losses against one other to determine a net short-term gain or loss.

For long-term losses, investors report these in Part II of Schedule D. Again, investors can net long-term gains and losses against each other to determine the net long-term gain or loss. After the investor completes these calculations separately in Parts I and II of Schedule D, they can net them together for an overall result.

For more information about tax selling (a strategy in which an investor sells an asset with a capital loss in order to lower or eliminate the capital gain that she or he realizes via other investments), see Investopedia’s comprehensive definition.

Worthless Securities and Valuation

Public company market value, also known as market capitalization, is the number of outstanding shares of a publicly-traded company, multiplied by the current share price. For a private company, valuation methods include comparable company analysis and/or an estimation of discounted cash flows. Worthless securities will have a market value of zero as noted above.

Penny stocks have the potential to become worthless securities. Because of their small market value, penny stocks typically trade outside of the major market exchanges (through the OTC Bulletin Board [OTCBB] and pink sheets) at a relatively low price ($5 or less). These stocks are considered highly speculative and high risk, due to their lack of liquidity, large bid-ask spreads, small capitalizations, and limited followings and disclosures.

Investopedia recently profiled the top penny stocks to watch for May 2021. These include:

  1. Fortuna Silver Mines Inc. (FSM)
  2. Solitario Zinc Corp. (XPL)
  3. AbraSilver Resource Corp. (ABBRF)
  4. Williams Industrial Service Group Inc. (WLMS)
  5. One Stop Systems, Inc. (OSS)