Question

On October 6, 2020, Walter purchased § 1244 stock in Brass Corporation for $8,000. On December 31, 2020, the stock was worth $9,500. On August 21, 2021, Walter was notified that the stock was worthless. How should he report this item on his 2020 and 2021 tax returns?

Answer 1

Walter purchased § 1244 stock in 2020 and it became worthless in 2021. He reports no gain in 2020, but for 2021 he would report a capital loss on his tax return, treated as if the stock became worthless on December 31, 2021, which can offset gains and certain income.

Step-by-step explanation:

When Walter purchased § 1244 stock in Brass Corporation for $8,000 on October 6, 2020, he was making an investment with the expectation of earning a return, either through dividends or a capital gain.

However, the subsequent notification on August 21, 2021, that the stock was worthless indicates that he incurred a stock loss. On his 2020 tax return, there would be no reportable event related to the stock's value increase as he did not sell the stock that year.

For the 2021 tax return, he should report the loss of his investment as a 'worthless security', which is considered a capital loss occurring on the last day of the tax year in which the stock became worthless, namely December 31, 2021. Capital losses can offset capital gains and up to $3,000 of ordinary income on a tax return.