When Stocks Become Worthless – At What Point Do the Losses Become Tax-Deductible?
In general, shares are purchased and later sold at a profit. However, if you’re unlucky, you may only be able to sell them at a loss. In addition, a total loss is also possible. This extreme scenario can occur if the company behind the shares becomes insolvent. Tax law stipulates that losses from the sale of shares can be claimed for tax purposes. But what about “worthless” shares? And at what point do losses in such a situation become tax-relevant? We will answer these questions in this article and examine current case law.
Stock has become worthless: Are the losses recognized for tax purposes?
It is not uncommon for shares to lose all value following a company’s insolvency and to be written off by the custodian bank. Investors are quick to conclude that this total loss can at least be recorded as a capital loss for tax purposes. In the past, however, the tax authorities held a different view. In this scenario, it would not constitute a sale of the shares at a loss. Although this statement is not incorrect, the wisdom of this approach is open to question. Various court rulings have since found the tax authorities’ views to be incorrect. It has been argued that the write-off of the shares constitutes a definitive loss of assets and is therefore tax-relevant. Without delving into the specifics of the rulings here, it can be stated that the loss resulting from a share that has become worthless can be claimed for tax purposes.
It should also be noted here that a loss from a stock that has become worthless may only be recognized as a loss for tax purposes if no compensation was paid as part of the insolvency proceedings. If, for example, the value of the shares is reimbursed, then naturally no loss has been incurred for tax purposes.
At what point does a stock become worthless and tax-relevant?
The previous explanations were relatively intuitive and easy to understand. However, one question that has not yet been clarified is exactly when a stock is to be considered worthless and when the point of tax relevance has been reached. What initially seems very obvious is not at all clear in practice. The total loss of a stock often becomes apparent some time before the stock is actually removed from the portfolio and the ownership rights are thereby lost. And this is where one must be very careful for tax purposes. Just because the insolvency and a loss in value of the shares are known and can no longer be prevented does not mean that the loss can be claimed for tax purposes at that point. A ruling by the Federal Fiscal Court (BFH) has provided clarity on this matter.
So let us note that the loss relevant for tax purposes only arises when the shareholder’s ownership rights expire due to the legal settlement or when the removal of the shares from the portfolio signifies a definitive legal loss. Even if the loss in value may already be established before this point in time, tax benefits only take effect later. This applies only if the aforementioned conditions are met. This rule is now very clearly supported by case law. The fact that the loss is considered “secured,” for example, is not sufficient, which repeatedly leads to conflicts. As already mentioned, however, you can avoid this dispute with the tax authorities and simply wait until the loss is actually “final.”
Tax Consulting in Düsseldorf and Oberhausen
We hope you enjoyed this post. With this and other tax-related topics, it is often the case that the issues at hand are complex and, in many instances, shaped by case law. Unfortunately, these regulations can also change from time to time. It is nearly impossible for an individual or business owner to keep track of everything. Therefore, you should always rely on a qualified tax advisor for tax-related questions. At Trimborn . Partner, it is our mission to always stay up to date for you. Our qualified team is always ready to assist with tax questions and concerns, drawing on our expertise and up-to-date information. Rely on our many years of experience. With our offices in Düsseldorf and Oberhausen, we are always available to answer your questions. Contact us to schedule a consultation.
