Jim Loukota of Baltimore County is trying to make the best of a soured investment.
The 60-year-old retired electrician owns 100 shares of First Mariner Bancorp that he bought for about $14.50 per share in the late 1990s and closed Monday a little over 5 cents a share.
He wants to sell the stock in the Baltimore-based bank holding company before the end of the year so he can use the loss to offset income on his tax return. But the discount brokerage that originally sold him the stock says it doesn't deal in shares trading below $1. And he's having trouble finding anyone else willing to help him sell his paper stock certificate.
The retiree says if he could deduct his losses on his taxes, at least the stock would be worth something. As it is, he says, "it's worth less than nothing."
Loukota's problem largely stems from the fact that his shares are in paper certificate form, which can be cumbersome to trade. This hurdle can be overcome — more about that later.
But his situation raises issues that many other investors face: What can be done when a once-promising stock is now worth only a fraction of its purchase price or, worse, nothing at all? Investors often hold onto losing stocks, hoping they will recover at some point. But if a stock doesn't revive, at least investors can still make lemonade out of a lemon.
In this case, the lemonade is a tax deduction.
If you have shares that are worthless, you can use the loss to offset any capital gains you might have for the year. Losses that exceed gains can be used to offset up to $3,000 in regular income on your federal tax return.
It's a high hurdle for a stock to be deemed truly "worthless," says Melissa Labant, technical manager with the American Institute of CPAs. To meet that standard, you must have no reasonable hope of getting any money in return for the shares, she says.
Some brokerages help clients stuck with stocks with no value or no market for them by buying the shares for a penny each, or $1 for the lot.
That way, clients can get a tax form showing they sold the shares for a loss and can claim the tax break, says Bill Socha, chief operating officer for Lombard Securities in Baltimore. The brokerage will hold onto the shares for several years until the Depository Trust Co., a clearinghouse for stocks, deems them worthless, he says.
Sometimes, though, what investors consider a useless stock has value in the marketplace — just not the one they're used to.
Troubled companies that no longer meet the requirements to be listed on U.S. stock exchanges can end up being quoted "over the counter" — a platform that allows brokers to trade the shares. This is what happened to First Mariner this year.
OTC Markets operates the largest quotation system for unlisted securities. It divides stocks into three tiers, from highly speculative startups that provide little public information to major foreign companies that choose not to be listed on U.S. exchanges.
Tim Ryan, managing director of OTC Markets, says all companies quoted on the platform have a "market maker," a firm that agrees to buy and sell a company's stock to facilitate trading.
First Mariner, which is quoted on the platform, has 16 market makers, Ryan says. The stock is also traded on the Financial Industry Regulatory Authority's Over-the-Counter Bulletin Board, which lists one market maker.
Given that, it appears Loukota will be able to find a buyer for his stock. He just needs to find someone to help him sell it.
Most people buying stocks these days have them held in "street name," in which the shares are registered under the name of the brokerage that maintains a list of the owners. Stock issuers also allow direct registration, in which investors are listed as owners on the company's books and no certificate is given.
You still can get an old-fashioned paper certificate. To sell it, Socha says, you will have to submit the certificate to a brokerage and have the shares put in street name, a process that can take as long as eight business days.
Besides, brokerages "can decide what certificates they are willing to trade," says Gerri Walsh, FINRA's vice president of investor education.
And in cases where the number of shares is small and the stock not worth much, brokerages might decide it's not worth their time to execute the sale, experts say.
Loukota has some options. Experts say many banks, including First Mariner, have brokerage departments, and investors can open an account there and sell the bank's shares.
And a local broker, hearing of Loukota's predicament, agreed to help him out.