Q. I own 500 shares of some almost worthless stock and I’m sick of seeing it on my brokerage statements. I thought about selling it earlier this year but figured it couldn’t go much lower, so I decided to hold on till year end. Boy, was I wrong. Now it is going to cost me more to sell it than it’s worth. Should I try to donate it to a charity instead of selling? Should I sell any of my good stocks that are up now to lock in gains and pay tax at a rate that is probably lower this year than next?
A. You don’t want to donate stock with a loss to a charity, for two reasons in this instance. One is karma; you don’t want to dump this almost worthless security on a charity, transferring the problem of disposal to them. Secondly, if you donate the stock you will miss out on the tax loss. Ask your brokerage firm if they will liquidate your holdings in the stock. Most brokerage firms will liquidate as a courtesy, and waive or reduce the normal commission or transaction fee. The liquidation will be treated as a sale, which will enable you to report a capital loss on your tax return. Your basis will be the purchase price and any acquisition costs. If the stock paid a dividend you had reinvested this dollar amount will be added to your basis. A gain or loss is determined by taking the difference between the sales price (in your case probably close to zero) and your adjusted basis.
A loss can be used to offset capital gains. If your losses exceed your gains, up to $3,000 ($1,500 for married filing separately taxpayers) of excess capital losses are deductible against ordinary income each year. Any loss amount over this amount will be carried over to future tax years. You can carryover capital losses until death. When a taxpayer dies with an unused capital loss carryover, the carryover dies too. The annual $3,000 loss limitation applies to the final Form 1040 of the deceased taxpayer. Any excess capital losses are lost.
Avoid the wash sale rule. You will lose your loss deduction if you buy substantially identical stock or securities in a fully taxable trade within 30 days before or after the sale of this worthless stock.
If you have appreciated stock and want to make a thoughtful donation to charity, gift the stock rather than cash. You will be able to deduct the fair market value of the stock, and neither you nor the charity will pay taxes on the appreciation.
If you have a need for cash within the next couple of years, selling appreciated stock this year is probably a good idea. We can’t accurately predict the direction of the stock market but we do know that capital gain tax rates are currently very low. Remember that the stock must have been held more than a year to qualify for long-term capital gains treatment.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, NC 27624