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24
May
  • Posted By : Administrative
  • Category: General Tax Topic
  • Comments: 0

WHY DO SHARES AND OTHER SECURITIES BECOME WORTHLESS?

When a liquidator or administrator declares that the shareholder or bondholder will receive no further distribution in case of winding up the company, then securities of that company become worthless. In simple words, worthless securities are those that have a market value of zero. Usually when company becomes bankrupt, its securities become valueless or very negligible in value and shareholders become unable to sell their shares. Then the securities of that company are recognised as worthless securities. Worthless securities can include:

  •   Convertible notes; 
  • Debentures; 
  • Bonds; 
  • Promissory notes; 
  • Loans to the company; 
  • Futures contracts; 
  • Forward contracts and currency swap contracts relating to the company; 
  • Rights or options to acquire any of these, including rights or options to acquire shares in a company.

Worthless securities have a distinct impact on taxation. One can claim a capital loss for worthless securities on tax return. However, there are some certain rules & regulations and conditions which need to be satisfied before claiming a capital loss.


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