DEFINITION of 'Worthless Securities'

Worthless securities have a market value of zero. Worthless securities can include stocks or bonds that are either publicly traded or privately held. These securities, along with any securities that an investor has abandoned, result in a capital loss for the owner and can be claimed as such when filing taxes.

BREAKING DOWN 'Worthless Securities'

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, she 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 Methods of Valuation

Public company market value, also known as the 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.

Worthless Securities and Penny Stocks

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 listed the ten top-performing penny stocks in July 2018. These were:

  1. Enphase Energy Inc. (ENPH)
  2. Bellerophon Therapeutics, Inc. (BLPH)
  3. Genesis Healthcare, Inc. (GEN)
  4. Senseonics Holdings, Inc. (SENS)
  5. Denbury Resources Inc. (DNR)
  6. Ascena Retail Group, Inc. (ASNA)
  7. Neptune Technologies & Bioresources Inc. (NEPT)
  8. Cerecor Inc. (CERC)
RELATED TERMS
  1. Capital Loss

    A capital loss is the loss incurred when a capital asset that ...
  2. Bag Holder

    Bag holder is an informal investment term used to describe an ...
  3. Capping

    Capping is the practice of selling large amounts of a commodity ...
  4. Marketable Securities

    Marketable securities are liquid financial instruments that can ...
  5. Capital Loss Carryover

    Capital loss carryover is the amount of capital losses a person ...
  6. Capital Gain

    Capital gain is an increase in a capital asset's value that is ...
Related Articles
  1. Taxes

    How to deduct stock losses from your tax bill

    Learn the proper procedure for deducting investment losses and get some tips on how to strategically structure them to lower your income tax bill.
  2. Investing

    Why Do Penny Stocks Fail?

    Penny stocks are speculative and highly risky investments. Lack of government and stock exchange oversight and general information leaves penny stock investors open to sudden losses.
  3. Investing

    Understanding Penny Stocks' Risks and Rewards

    Penny stocks can soar in a short period, but dabbling in them is a dangerous game. Here is a breakdown of the risks and rewards of penny stocks.
  4. Investing

    The Lowdown On Penny Stocks

    Think penny stocks will make you rich? If you don't understand the risks, you could end up penniless. Learn the potential traps you may fall into in penny stock investing.
  5. Investing

    Who Actually Trades or Invests in Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily.
  6. Financial Advisor

    How to Help Clients Harvest Tax Losses by Year End

    Here's how to help clients employ tax-loss harvesting to reduce their taxes before year end.
  7. Financial Advisor

    The Most Crucial Financial Ratios For Penny Stocks

    Given adequate financial disclosure, investors can use some of the same financial ratios for valuing blue chip stocks to evaluate penny stocks.
  8. Trading

    Penny Stocks to Watch for August 2018

    The August penny stock list features a variety of cup and handle breakout patterns.
  9. Trading

    Penny Stocks Vs. Forex: Which Is Right for You?

    Learn more about penny stock trading and forex market trading, and why each investment class appeals to different types of investors.
  10. Tech

    Bitcoin Is ‘Worthless’: London's Capital Economics

    While stocks are likely to fall further in 2018, bitcoin will be worse off, says the research firm.
Trading Center