Neither is better in the abstract. They're different instruments for different facts. A worthlessness claim is an assertion you make and support; a sale is an event you cause and document. The right question isn't which one is stronger — it's which one your facts can actually carry. This page puts the two side by side so you and your advisor can see where each one holds and where each one fails.
The comparison
| Claim it worthless (§165) | Sell it (§1001) | |
|---|---|---|
| What it is | An assertion that the position became wholly worthless in a specific year | A dated transfer to a buyer for consideration |
| What you must show | Total worthlessness and the year it happened, tied to an identifiable event | A real sale: unrelated buyer, actual consideration, executed agreement, documented transfer |
| Deemed or actual date | Deemed sold on December 31 of the year of worthlessness | The actual date the sale closes |
| Needs a buyer | No | Yes — and there is no market, which is the practical obstacle |
| Needs an argument about value | Yes, and it must survive scrutiny | No — you report the price received, not a claim of zero |
| Where it fails | The company went quiet with no event; residual value can't be ruled out; the year is contestable | The sale isn't real — related party, no consideration, shares handed back, no executed agreement |
| Amendment window | Seven years for worthless securities, because the year is so often disputed | The ordinary window; the year is fixed by the sale date |
| Reported on | Form 8949 / Schedule D as a deemed sale (or as bad debt, depending on the instrument) | Form 8949 / Schedule D as a sale |
| Character of loss | Depends on the instrument — capital, nonbusiness bad debt, or §1244 ordinary; advisor determines | Same question, same determination; the sale doesn't change the instrument's character |
| Later recovery | Generally income when received | Belongs to the buyer |
Where the worthlessness path is the natural fit
When the company handed you the event. A dissolution filing, a bankruptcy with a stated zero recovery for your class, a final K-1 marked final, or a letter saying no proceeds are expected. With a document like that, the two hard questions answer themselves, and a sale would be adding a step you don't need.
Where the worthlessness path struggles
When the company simply went silent. No filing, no letter, no final K-1 — just a stopped stream of updates. Now both questions are open. You can't point to an event, and you can't rule out that the company is sitting on a small balance somewhere. Some advisors will build a file — screenshots of the dead website, the founder's new job on LinkedIn, the unanswered emails — and take the position. Others won't. Either way, it's an argument, and you're the one who has to make it.
The same is true for a SAFE that never converted. There's no security in the ordinary sense and no conversion event, so the worthlessness framework fits awkwardly from the start.
Where a sale is the natural fit
The silent case, mostly. A sale doesn't ask whether the position is worth zero or when it got there. It asks whether you transferred it, to whom, for what, and on what date — and those are questions you can answer with paper. That's why the sale path exists for positions that have no market: it converts an open-ended argument into a closed, dated fact.
DivestMe, LLC is the buyer for that sale. It's an independent, unrelated party; it purchases the position for $1.00 under a counter-signed Asset Sale Agreement; and you pay a flat $150 fee per position for the documentation — the agreement, a Certificate of Completion, and a record your preparer can attach. DivestMe documents the sale and does not determine eligibility. Whether the loss is allowed, in what year, and in what character remains your advisor's call.
Where a sale fails
When it isn't one. The IRS disregards sales that lack substance: a transfer to a related party (disallowed outright under §267), a "sale" with no consideration, a transfer where the shares come back, or an agreement nobody actually executed. The price being small isn't the issue. The transaction being real is.
The question to bring to your advisor
Not "which path is better," but: What do my facts support? If you have a document, say so. If you have silence, say that. The path follows from the answer, and it's your advisor's to choose.
What your advisor will need either way
Gather these before the conversation; they’re the same for both paths:
- What you bought, and from whom: stock, preferred, SAFE, note, LLC or LP interest.
- Cost basis — what you actually paid, plus any later contributions.
- Acquisition date, and the subscription or SAFE document itself.
- Every communication from the company since, including the last one.
- Any K-1 or 1099 ever received, and the last year one arrived.
- Whether the stock might be §1244 small-business stock (possible ordinary-loss treatment, subject to limits your advisor will check).
Timing
A sale counts for the year it closes. A disposition executed on December 31 belongs to that year; one executed on January 1 belongs to the next. If you and your advisor decide a sale is the right path and you want the loss in the current year, the paperwork has to be complete before year-end — not started.
If you think the position may have gone worthless in a prior year, raise that with your advisor before doing anything else. That’s a separate question with its own answer.