When a private position has stopped reporting, an AI assistant or a tax advisor will often mention three ways to deal with it: a claim with no transaction, an abandonment, or a sale. They are different events, and each leaves a different record. This page lays out what each one is and what each involves, so you can follow the conversation with your advisor. It doesn’t rank them, and it doesn’t say which one fits your position. That depends on your facts, and it’s your advisor’s call.
The three paths an advisor may raise
- A worthlessness claim. No transaction takes place. The taxpayer establishes that the security became wholly worthless, and in which year, from identifiable events. (How this path and a sale differ.) Worthlessness is an argument; a sale is a fact.
- Abandonment. The holder permanently surrenders and relinquishes all rights in the security and receives no consideration in return (Treas. Reg. §1.165-5(i)).
- A sale. There is a counterparty, consideration, a signed agreement, and a date.
What each involves in practice
Abandonment. Typically a written notice to the company relinquishing all rights in the security. The record is a letter the holder wrote and, ideally, evidence that the company received it, such as a delivery confirmation or a reply. No consideration changes hands, and there is no counterparty. This is different from a letter from the founder stating that the shares are worthless, which is evidence for a worthlessness claim, not an abandonment.
Sale. A counter-signed agreement and a dated record from a buyer. The company isn’t contacted and isn’t a party to the transaction.
Worthlessness claim. Evidence of identifiable events, such as a dissolution, a bankruptcy filing, a final K-1 or a letter from the company, and of the year they occurred. With no transaction, that evidence is the record.
What each path settles on its own
Who owns it now?
- Worthlessness claim §165(g)
You still do.
Open- Abandonment §1.165-5(i)
No one, by your letter.
Open- A sale to DivestMe §1001
A named buyer, on record.
Settled
What’s the date?
- Worthlessness claim §165(g)
The year it became worthless.
You identify it.
Open- Abandonment §1.165-5(i)
Last day of the tax year.
By rule.
Settled- A sale to DivestMe §1001
The date on the agreement.
Settled
Does it cover a SAFE, a note, an LLC unit?
- Worthlessness claim §165(g)
It depends.
The rule names stock and certain corporate debt.
Open- Abandonment §1.165-5(i)
It depends.
Same definition of “security.”
Open- A sale to DivestMe §1001
Yes.
A sale covers any property.
Settled
What does it ask of the founder?
- Worthlessness claim §165(g)
A letter saying it’s dead.
The one they don’t want to write.
Open- Abandonment §1.165-5(i)
Receive your notice and cancel the shares.
Then do it for every investor.
Open- A sale to DivestMe §1001
Nothing.
A signature only if your documents require one.
Settled
What does your preparer get?
- Worthlessness claim §165(g)
Whatever you can assemble.
Open- Abandonment §1.165-5(i)
A copy of your letter.
Open- A sale to DivestMe §1001
Counter-signed agreement, certificate, preparer record.
Settled
Settled— by the path itself.Open— for you and your advisor to establish.
Deductibility is a separate question on every path.
What each path leaves open
What an abandonment leaves open. An abandonment has no counterparty. The holder gives up the position, but no one acquires it, and the company that would cancel the shares usually isn’t operating. The record is the holder’s own letter. The regulation that permits abandonment (Treas. Reg. §1.165-5(i)) says all the facts and circumstances determine whether an abandonment occurred or whether the transaction was something else, such as a contribution to capital or a gift. It covers “securities” as §165(g)(2) defines them, which means stock and certain corporate debt; it does not name SAFEs, and partnership and LLC interests fall under different rules.
What a sale leaves open. A sale has a counterparty: a second party acquires the position under a signed agreement, for consideration, on a stated date, so the end of the holder’s ownership is evidenced by the start of someone else’s. What a sale depends on is that the transfer is permitted.
Most transfer restrictions in startup documents are rights the company could exercise, such as a right of first refusal or a consent requirement; some belong to other holders. When the company has stopped operating, there is usually no one to exercise the company’s rights, but a restriction can still apply. Under the agreement, you represent that the sale doesn’t breach any agreement your position is subject to, so check your purchase documents before you sign, and raise any restriction with your advisor.
Questions to bring to your advisor
- How does each path apply to the way I hold this position: stock, a SAFE, a convertible note, or an LLC or LP interest?
- Timing: which tax year would each path fall in, and is there a date I need to act by?
- Is §1244 relevant here? It can apply only to stock that meets specific conditions, and your advisor will check whether this position is one.
- Do transfer restrictions in my purchase documents (the stock purchase agreement, SAFE, note or operating agreement) apply?
How a capital loss is reported
A loss on a capital asset is reported on Form 8949, with totals flowing to Schedule D. Capital losses offset capital gains; up to $3,000 of any remaining loss ($1,500 if married filing separately) can offset ordinary income in a year, and the rest carries forward to later years. An ordinary loss under §1244, where it applies, is reported on Form 4797. These are the reporting rules in IRS Publication 550; whether a loss is allowable, in what year, and in what character is determined by the taxpayer and their advisor.
Where DivestMe fits
DivestMe is one way to complete a sale. It doesn’t do abandonments, and it doesn’t tell you which path to take. When DivestMe is the buyer, it pays $1.00 for the position under a counter-signed Asset Sale Agreement, and you pay a flat $150 fee per position for the documentation. See how it works; your advisor can read the reporting mechanics of the sale in the white paper.