Worthless Securities

From TaxAlmanac

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

How to report loss. Worthless securities are reported on Schedule D (Form 1040), as either a short-term or long-term capital loss, whichever applies. In the 'Date Sold' and 'Sales Price' columns, the notation “Worthless” should be entered. The loss is reported in the gain (loss) column.

Filing a claim for refund. If the loss from a worthless security is not claimed on the original return for the year that it becomes worthless, a claim can be filed for a credit or refund due to the loss. Form 1040X, Amended U.S. Individual Income Tax Return, can be used to amend the return for the year that the security became worthless. It must be filed within 7 years from the date the original return for that year had to be filed, or 2 years from the date that the tax was paid, whichever is later.

Source: IRS Publication 550