Tax treatment
Worthless Stock Write-Off
A failed position can become a real tax loss — but only once it's provably worthless, not merely struggling.
What it is
When a startup shuts down or a position becomes genuinely, provably worthless, the loss can generally be claimed as a capital loss — deemed to occur on the last day of the tax year the stock actually became worthless, not whenever you decide to write it off.
Why it matters for a secondary
A real tax silver lining on a failed angel position. Section 1244 can, for qualifying small business stock, let a limited amount of the loss be treated as an ordinary loss (more valuable than a capital loss) rather than capital — a separate, narrower provision from Section 1202/QSBS despite the similar-sounding name, worth checking independently.
Quick facts
- Timing
- Loss is deemed to occur on the last day of the tax year the stock became worthless
- Evidence needed
- Documentation the company ceased operations, dissolved, or is otherwise provably valueless — not just a guess
- Section 1244 ordinary-loss treatment
- A separate, narrower provision from Section 1202 QSBS — confirm your stock and company qualify
Common mistake: Claiming the loss too early, while there's still some residual possibility of value, or too late, after the amended-return window has closed.