Are Bankruptcy Losses Tax Deductible?

Bankruptcy leads to all kinds of financial stresses. Some people may wonder how filing for bankruptcy will impact their taxes. They may also wonder if they can deduct a stock loss that happens as a result of bankruptcy.

Here are some straight answers about what can be deducted on your taxes and how bankruptcy really impacts your annual filing:

Bankruptcy and Stock

In most scenarios, a person must sell stock to claim a capital loss. This can be very difficult if the person or the company they own stock in has gone bankrupt. Generally, people are unwilling to purchase stock in bankrupt companies, as it is considered worthless. So, what do you do when you own stock in one of these companies and need to sell?

Thankfully, the IRS recognizes the challenges in this scenario. They make exceptions, allowing for deductions for stock sold during bankruptcy. The caveat is that careful documentation must be made to demonstrate the “worthless” status of the stock you own. A legal professional can help you do this – and help you unload further worthless stocks.

Proper Loss Documentation

When documenting your capital losses for tax purposes, you will receive a worksheet known as Form 8949. The information you enter on this sheet will eventually be transferred to Schedule D and moved to your Form 1040 during tax preparation.

Some tips for documenting your stock losses include:

  • Enter the information about your stock on either line one of part one on your sheet, or line three of part two. These are standard locations for information regarding stock sales.
  • When asked for the sales price, enter “worthless”.
  • When prompted for the date of sale, enter the last day of the trading year in which your stock was sold.
  • When asked if this transaction was included on a Form 1099-B – where other stock sales and acquisitions are included – check the box corresponding to “no”.

Make sure to keep documentation of the date your stock became worthless. This will help you in the event of an audit, in which the IRS will require proof of the worthless status of your stock.

For further assistance with taxes after bankruptcy – and all manner of bankruptcy questions and concerns – speak to the experienced Phoenix, AZ bankruptcy attorney team at the office of Larry P. Karandreas. We can help you navigate the entire process – including what happens once your bankruptcy is discharged. Give us a call today to learn more.

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