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How to unload penny stocks without losing big bucks


Q: Several years ago, I briefly became interested in so-called penny stocks and purchased several different ones. They have turned out to be "cents-less" investments.

I'd like to unload them this year for tax purposes, but for the most part, the proceeds won't even cover the broker commission fees. Is there a provision for reporting such stocks as tax write-offs without actually selling them?

A: Yours is really a three-part question:

1) What is the Internal Revenue Service definition of "worthless securities"?

2) What documentation would the IRS require as proof of value or lack thereof?

3) What is the most efficient way to sell low-price or penny stocks?

If there is a market for a stock, any market at all, even at 1 cent a share, the stock is not considered worthless for tax purposes. The only way to get the tax write-off for the loss is to sell the stock outright. Anything else is simply deemed a drop in price, which does not qualify for a write-off until it is booked.

Since most discount brokerage firms have minimum fees for transactions (generally $30 to $45, depending on the firm), this charge can exceed proceeds from the sale of low-priced securities.

Theoretically, what you should do is sell your stock through a firm that doesn't have a minimum commission level. Most of the national full-service brokerage firms charge a maximum commission of 25 percent of the proceeds.

In reality, most brokers would be reluctant to provide this service for someone just walking in off the street. This is especially true for brokerage firms that don't pay their brokers for trades that generate less than $35.

Still another consideration is the location of the certificates. If they are held at a full-service firm, there's no problem. Just call the broker and place your sell order. If you've traded with this broker before, he will most likely do this as a favor to you.

If your stock is currently in the hands of a discount broker with a minimum commission level, the logistics are easier if you bite the bullet and pay that minimum fee. The commission costs are added to your capital loss.

If the stock is truly worthless, meaning there is no market for it at all, your broker should write you a letter to that effect. This letter is sufficient proof, for tax purposes, that the stock has no value, and you can get the entire write-off.

Susan Bondy founded her namesake financial services compan 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to her in care of The Sun, 501 N. Calvert St., Baltimore, Md. 21278. All letters will be treated confidentially.

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