Own any stocks in or bonds issued by dotcoms or other companies that went under? The tax law can help to provide you a bit of relief.

Worthless securities. You can claim a capital loss if securities become completely worthless during the year -- they had some value at the end of 2000 but have no value by the end of 2001. A sale is deemed to have occurred on the last day of the year in which the securities become worthless. Caution: Just because a company has filed for bankruptcy does not automatically make its securities worthless -- the company may continue to do business and plan to reorganize. Sure ways to establish worthlessness include the following:

  • The company liquidates -- the liquidation distribution may be zero -- and issues Form 1099-DIV showing this fact. The liquidation date is the date of " sale."
  • You sell your securities to your broker -- typically for a $1 or so -- to fix a sale. Alternatively, ask your broker for a letter stating the securities have become worthless.

Did you learn that securities you' ve held became worthless some time ago? You have seven years to file an amended return reporting worthless securities. For example, you have until April 15, 2003, to report a capital loss on securities that became worthless during 1994 or later.

Small-Business Investment Company (SBIC) stock. You can claim an ordinary loss deduction if SBIC stock becomes worthless -- there' s no dollar limit. Such a loss can be taken into account in figuring a net operating loss.

Section 1244 stock. You can claim an ordinary loss of up to $50,000 ($100,000 on a joint return regardless of whether one spouse was the sole owner) if small-business stock becomes worthless. Losses in excess of the dollar limit are treated as capital losses.

To qualify as Section 1244 stock, the corporation' s equity may not have exceeded $1 million at any time since the stock' s issuance. The corporation must be an operating company -- not a holding company -- for at least five years (or the time it was in business if less than five years). And you must have acquired the stock by paying cash or property (not by inheritance, gift, or the exchange of services for stock).

Caution: If a partnership or limited liability company owns Section 1244 stock, the loss can be passed through to owners. But S corporations may not own Section 1244 stock and cannot pass through such losses to shareholders.

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