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Unload that 'worthless' stock

Even shares in companies that have gone bankrupt have a market. Finding it, and cashing out, can mean claiming a loss at tax time.

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Now that the stock market has laid its third egg in as many years, just about every investor has had a chance to lose a shirt - or two - on a dotcom or high-tech dud.

So now it's high time to flush these turkeys from your portfolio. But if the investment has become completely worthless, you'll have to go to some extra work to write the loss off on your income taxes.

The Internal Revenue Service has had plenty of experience with taxpayers and worthless securities. It even puts out a pamphlet, Publication 550, which explains the mechanics of such losses.

It's not a terribly complicated procedure, as far as IRS rules go, but it does involve extra homework by the investor to make sure all the appropriate rules are followed.

For starters, the IRS demands that a security be sold before a loss is claimed. That puts the onus on the investor and his or her stockbroker to find a market for the investment. For the most part, any shares sold now won't help you cut your bill for tax year 2002.

Some fallen angels may get booted from the big exchanges when they declare bankruptcy, but their stock still trades in what are called "pink sheets." Even if a company is trading for a cent a share, or a tenth or hundredth of a cent, there sometimes can be trading, and if a willing buyer is found, then the security has to be sold to establish its cost basis.

"Many people are under the impression that if a company is bankrupt [its stock is] worthless," says Max Klinger, a tax-policy expert based in Laramie, Wyo. But even disgraced energy giant Enron Corp. still trades while in bankruptcy court, and although a share fetches just a few pennies, it has a market nonetheless.

Selling the stock of a firm that has gone bankrupt is "cleaner and neater in terms of IRS [treatment]," says Mary Burnes, who manages equity trading for St. Louis-based brokerage house Edward D. Jones. But sometimes bad things happen to bad companies, or, as Ms. Burnes puts it, "There are some stocks that just delist and never trade."

So what do you do if there are no buyers? Here again, a good stockbroker can still ride to the rescue. In what are sometimes called "penny for the lot" transactions, or variations on that theme, a brokerage will buy its client's worthless stock for a lowly penny, for instance. This creates the transaction and the paperwork that the IRS needs to see before there is a write-off attempt.


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