A private company I bought stock in went bankrupt. Do I need to get a form from them to claim it on Sched D?

Question

It was not a public stock. It was a friend and we helped her and her husband start a business. We gave them 1000 for 1000 shares of common stock in their private company. They tried hard and for a while they were doing well, but the market changed and they lost everything.

No biggie, it was money we expected to lose but would have been happy if it made out. (Like any other gamble.)

I know we take a capital gains loss on Schedule D. But are they supposed to give us any particular tax form or something to show that the stock we paid for went to $0?

(We have copies of their corporate tax forms for the prior years, and this year they will fill out the final tax form showing the total loss. But I don't imagine we're supposed to send their tax form in with ours.)

They were a regular C corp, not a sub-S or anything.

We didn't want them to lose! But we always face speculative investments with the idea that we might lose everything on it, so it's no catastrophe if we do. That's what I meant. (We really wanted them to succeed! They were and remain good friends.)

Answer 1

You can take a loss in the tax year that the stock was declared worthless. While it's sometimes hard to get an official declaration of such with a publicly traded company -- it took a while to get it from Enron -- it may not be so bad with your friends. Just ask them for an official declaration of worthlessness (from a corporate officer) and you should be OK with the IRS.

If this was a prior tax year you'll have to file an amended return for the year it was declared worthless. The normal 3 year rule for getting a refund is extended to 7 years in cases of worthless stocks. Only you can decide if the hassle and expense of filing is worth the $100 - $350 that you'll get back from the IRS for a loss on $1,000 worth of worthless stock.

If it's for the current tax year, by all means get the declaration statement and file Schedule D with your 2007 return.

Note to ProfessorC: Stockholders are NOT creditors of the corporation. They sit at the tail end when a corp goes bust. By the time that the BK gets to them, there's normally nothing left but crumbs.

Answer 2

You should be able to get enough information from the file at Bankruptcy Court to show your investment is worthless.

Answer 3

On average, all deductions are 15 cents on the dollar. Sometimes its not worth the paperwork.

Answer 4

They need to file bankruptcy so that you can be listed as a creditor.