Once in a while a stock or bond you bought has big problems and becomes worthless.
A security (stock or bond) that becomes worthless during the year is treated (and reported on your tax return) as if it were sold on the last day of the year.
The definition of worthless means the stock or bond has no value or potential value because of an identifiable event, like bankruptcy. The owner must abandon the security. That helps show the worthlessness to the owner. To abandon the security, you must permanently surrender and give up all rights in it and you receive no consideration (payment) for doing so. It must be fully worthless to get the deduction.
If it is only partly worthless, you need to sell the item and claim your capital loss. For example you paid $4,000 for it and it is only work $100. If you sell it you have a $3,900 capital loss.
If the security is section 1244 stock, a full ordinary loss may be deducted of $50,000 (or your cost if less) for a single taxpayer and up to $100,000 of cost for married folk filing a joint return.
An example could be you purchased a stock in 2016 for $4,000. You receive a notice from that company or someone in charge of it in 2017 that the shares of the stock are worthless. It is treated as a long term capital loss, even if you did not own it for more than a year before it became worthless.
Usually the security you bought is a capital asset and the loss is a capital loss. Capital losses are deductible against capital gains and up to a $3,000 deduction can be claimed on the first page of your return with the unused capital loss carrying over to the next year.
Congress has indexed some tax laws to inflation, but the $3,000 capital loss deduction is the same as it has been for many years.
Sometimes the stock that is worthless is not listed on a major stock exchange. You might work with a stockbroker or the company representative to sell it and/or prove worthlessness.
It is no joy to buy an investment only to discover it was a mistake to buy it. Just look at all the good decisions you made, take your loss and move on with your life. At least get the income tax savings of the loss.
Did you hear, “All uncertainty is fruitful so long as it is accompanied by the wish to understand.” Antonio Machado, poet