No need to click on it, but back in this thread viewtopic.php?f=8&t=25985&hilit=+abandon I asked this: Z (also known as Nilodop), owns stock that has a tax basis. He had dreams of retiring on its ultimate value. Dreams did not come true, and it's now worth about 30 cents per share, compared to its tax basis of about $9.00 per share. Z held it way too long. Now he can either sell it for 30 cents and have a per share cap loss of $8.70, limited to $3,000 per year, or abandon it, apparently after being told the tax consequences of both choices and with a need to ascertain both his intent and an affirmative act of abandonment. Z would want the abandonment treatment, I guess, because that makes itan ordinary loss as there is no sale or exchange.
As I recall the rules, a sale of stock at a loss yields a capital loss, with its attendant limitations on use to reduce taxes.
If the same stock is worthless (I think it means literally, not just almost), it's treated as a capital loss on the last day of the year in which it becomes worthless. (As an aside, the law says "shall be" but the reg. says "may be". I'd say shall wins.)
And if the same stock goes way down but does not become totally worthless, the ways to get a tax benefit seem to be to either sell it, receive some minor proceeds, and accept the limitations on using capital losses , or to take whatever outright steps are needed to abandon it in a legal and economic and permanent sense, thereby getting an ordinary loss, with all its usual advantages over a capital loss.
Depending on how close to worthlessness the stock becomes, the abandonment results can be very attractive in a tax sense. And it's very clear that a mere decline in value is not deductible. See 1.165-4. So is abandonment a bullet-proof technique to turn a likely capital loss into a sure ordinary loss?
One concern I have is some sort of argument by IRS akin to the one where a personal residence that has declined in value is turned into a rental. The decline in value up to the date of conversion is not deductible. But I don't see this applying to an abandonment of stock. It always was an investment, so there's no different use. It would be a big stretch, I believe, to disallow a real, substantive abandonment loss on the argument that one does not (cannot?) abandon an investment that has any value. Why not?
So if someone is in a research mood, please let me know whether this technique has been challenged by IRS, and what was the outcome.
And in case we het that far, would the wash sale rules become relevant if I, shortly after abandonment, decide it was a bad investment move, so I go out and buy the same stock on the open market.