Recognizing Losses on Worthless Securities As a taxpayer, you are allowed to take a capital loss for securities that have become worthless. However, this loss can only be taken when the security becomes totally worthless—losses for partial worthlessness cannot be claimed. To claim a capital loss, you must first correctly identify the year during which the security becomes completely worthless. Generally, a security is considered worthless at the time it first has no liquidation value and no reasonable hope or expectation exists that the security will become valuable at some future date. To avoid the “when a security becomes wholly worthless” issue, you should consider selling the security to an unrelated third party. A bona fide sales transaction in which you transfer ownership of the security at a loss should allow you to take the capital loss in the year of the transfer. If you do not or cannot sell the security (a good sign the security is worthless) your decision to claim the loss must be supported by available information. To provide some relief from the difficulties of determining when a security becomes worthless, the IRS allows a seven-year statute of limitations (instead of the normal three-year period) to file an amended return for refund claims due to losses from worthless securities. You can offset capital gains with capital losses (including losses from worthless securities), and to the extent there are excess capital losses, up to $3,000 ($1,500 for married filing separate returns) can be deducted against your ordinary income. Remaining capital losses can be carried forward indefinitely, retaining their character as either short-term or long-term.