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Tax Tips: How to Make the Most of a Bad Investment

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Bad investmentIt happens to even the best investors: Sometimes, what seems like a smart investment turns out to be a big loser. But even if you suffer a complete loss, you can still salvage something from your experience when you file your tax return.

Whenever you sell an investment that you own, you generate what's called a capital gain or loss. If your investments have done well, then the resulting gain boosts your taxable income, and therefore your tax bill goes up.

But if the investment you sell has lost value, then the resulting capital loss can bring you some tax savings.

Sometimes, though, you'll lose everything on an investment you still own. For instance, when companies declare bankruptcy, their stock often becomes worthless. But if that stock stops trading on the public markets, you may lose the chance to sell your shares to claim your loss.

Fortunately, the IRS in some circumstances lets you claim a complete loss without actually selling your investment. Known as the worthless stock provisions, the tax law basically allows you to act as though you had sold the shares -- as long as they truly have no value.

To claim losses on worthless stock, you complete your tax forms in much the same way you would a regular capital loss on a stock sale. The sale date is treated as if the loss happened on the last day of the year, and you can put the word "worthless" in the spots for the sale date and sales price columns. But you'll get the same write-off you would from actually selling the shares for nothing -- and you won't have to pay a brokerage commission or other fee to do so.

Obviously, no one wants to suffer a total loss. But if it does happen, you might as well get as much of a tax benefit from it as you can.

For more on smart tax moves:


Motley Fool contributor Dan Caplinger has done fairly well avoiding total losses so far, but he doesn't want to tempt fate. You can follow him on Twitter here.


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Ron Leroy

paying taxes on non profit investment made me laught. Its better make an investment buy yourself and get rid of crup like fannie and freddi. If you invest money in somthing real like real estate you cannot loose. Even if prices for houses go down you can rent them for profit until prices goes up.
http://www.leroyfinance.blogspot.com/

April 01 2012 at 10:31 AM Report abuse rate up rate down Reply
trotterwh

WHAT A BUNCH OF CRAP. YOU CAN ONLY WRITE OFF $3,000.00 A YEAR NONMATTER HOW MUCH YOU MAKE OR LOSE. IT WILL TAKE ME THE REST OF MY LIFE TO WRITE OFF FANNIE AND FREDDIE ALONE NOT TO MENTION ALL THE OTHER CRAP THESE CROOKS HAVE GIFTED ME. LOW INTEREST RATES, ANOTHER BUNCH OF CRAP MAKING THE STOCK MARKET GO UP. WHERE ELSE YOU GOING TO PUT YOUR MONEY. IN THE BANK, IN PROPERTY. GROSS HAS GOT IT RIGHT, THE MARKET IS FIXED.

March 28 2012 at 6:12 PM Report abuse rate up rate down Reply
1 reply to trotterwh's comment
Bren Harrison

this government here is conning everyone and we are all supposed to keep playing the blind stupid fools game that those scoundralous and corrupted govermnent heathens have already premeditated for us while they take our life's savings and property vALUES AWAY FROM US AND THEN EXPECT US TO PAY MORE TAXES SO WE CAN FUND THE RETIREMENT ACCOUNTS OF THOSE FEDERAL POSTAL EMPLOYEES WHO HAVE BEEN SELLING MARIJUANA AND COCAINE AS THEIR MOON LIGHTING CAREER AND ALL THE WHILE BEING PROTECTED BY THEIR BIG BROTHER..UNCLE SAM.. CORRUPT GOVERNMENT AND MODERN DAY SLAVERY IS THE NAME OF THEIR GAME. MAYBE ITS TIME FOR ALL US "WE THE PEOPLE" SHOULD UPRISE AND DO SOME OUSTING OF THE CORRUPTED GOVERNMENT, LIKE THE PEOPLE OF EGYPT DID FOR THEIR GREEDY AS HELL RULER. BY THE WAY DIDN'T OBAMA GIVE THAT SCOUNDREL POLITICAL ASYLYM HERE IN AMERICA. IT'S NOT JUST OBAMA THOUGH, ITS MUCH MORE WIDE SPREAD, YOU KNOW, ITS ALREADY IN ANYTOWN USA. IF I REMEMBER CORRECTLY, THE CONSTITUTION STATES THAT "WE THE PEOPLE" HAVE THE RIGHT TO ABOLISH THE GOVERNMENT. WHY ARE WE STILL WAITING? I COULD KEEP GOING, AND JUST SO IF SOMEONE TRIES TO CLAIM THIS TO BE A RANT, THEN THOSE PEOPLE ARE BLIND TO THE TRUTH AND CHICKEN SH_T TO STAND UP AND SPEAK OUT, FOR FEAR OF OPPRESSION FROM OUR CORRUPTED GOVERNMENT SCOUNDRALS IN ANYTOWN AND EVERYTOWN, USA. THE GOVERNMENT SUCKS.

March 28 2012 at 9:18 PM Report abuse rate up rate down Reply