If you invest in a business that fails, you can get a capital loss in the year that your stake becomes worthless. A non-business bad debt (typically, an uncollectible loan) is similarly deductible as a capital loss in the year it becomes entirely worthless. Be careful, though, that you do not simply forgive a bad loan-that will make it a potentially taxable gift instead of a bad debt.
To be considered worthless, a security must have absolutely no value. Even if it has a negligible value, you can’t claim a capital loss. Therefore, you should act by year-end to demonstrate its worthlessness.
One approach is to sell it to an unrelated party for a nominal amount. If you sell this worthless security to your neighbor for $1, for example, and complete the sale before December 31, you can claim a capital loss for 2002. The same concept applies to nonbusiness bad debts.
