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Worthless Stock Deduction: Failed Non-Traded REITs and BDCs (2026)

By Jorge··26 min read

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Quick Answer

A security that is a capital asset and “becomes worthless during the taxable year” is treated as sold on the last day of that year (26 U.S.C. §165(g)(1)); the regulation requires it to be “wholly worthless” (26 CFR §1.165-5(c)) and the loss to be “fixed by identifiable events” (26 CFR §1.165-1(b)). For a calendar-year taxpayer that last day is December 31, 2026 (our arithmetic from §165(g)(1)). A refund claim that rests on a worthless security has 7 years from the return due date instead of 3 (26 U.S.C. §6511(d)(1) against §6511(a)). The filings of six vehicles, read on October 17, 2026, show six different situations. Silver Star Properties REIT filed Chapter 11 on May 28, 2026 and told shareholders there is “significant risk that existing equity may be impaired or cancelled” (Form 8-K, accession 0001437749-26-019764). Hospitality Investors Trust’s plan, effective June 30, 2021, cancelled the old common stock and exchanged each share for a contingent value right capped at $6.00 (8-K, 0001104659-21-087898). GWG Holdings cancelled its common stock, preferred stock and L Bonds on August 1, 2023 and delivered wind-down trust interests (8-K, 0001213900-23-062120). DiversyFund’s Growth REIT I says it is “now in its winding up period” and shows $37,832,779 of members’ equity on June 30, 2026 (Form 1-SA, 0001213900-26-104093). None of these documents says that a share is worthless, and neither does this page: whether a holding is, and in which year, is a question for a tax adviser.

Key Takeaways

  • The Code treats a worthless security as a sale on the last day of the tax year it becomes worthless: “the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset” (26 U.S.C. §165(g)(1)). IRS Publication 550 (2025) says the same for “stocks, stock rights, and bonds” that “became completely worthless during the tax year.”
  • Falling value is not enough. 26 CFR §1.165-5(f) says a holder “shall not be allowed any deduction under section 165(a) on account of mere market fluctuation in the value of such security,” and 26 CFR §1.165-5(c) speaks of a security that “becomes wholly worthless.” A lower NAV or a suspended repurchase program is neither.
  • The year is set by events, not by the holder’s preference: a loss “shall be allowed as a deduction under section 165(a) only for the taxable year in which the loss is sustained,” as “evidenced by closed and completed transactions and as fixed by identifiable events occurring in such taxable year” (26 CFR §1.165-1(d)(1)).
  • Abandonment is its own test. 26 CFR §1.165-5(i)(1) says “to abandon a security, a taxpayer must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for the security.” The Hospitality Investors Trust and GWG filings show consideration delivered in exchange for the old shares (a CVR; wind-down trust interests), so whether that test fits them is a question for an adviser.
  • The refund window is longer for a worthless security: 7 years from “the date prescribed by law for filing the return” against 3 years in the general rule (26 U.S.C. §6511(d)(1) and §6511(a)). For tax year 2026 and an April 15, 2027 due date that is April 2034 (our arithmetic; the exact date depends on the due date that applies to the return).
  • The statute names “a share of stock in a corporation” (26 U.S.C. §165(g)(2)(A)). Silver Star, Hospitality Investors Trust and Lodging Fund REIT III are Maryland issuers and GWG is a Delaware corporation per their filings; DiversyFund Growth REIT I is “a Delaware limited liability company, taxed as a corporation” and USQ Core “is organized as a statutory trust under the laws of the State of Delaware.” We found no saved rule that settles the LLC and trust cases, so they are questions for the adviser.
  • Six filers, six different documents: Silver Star has a Chapter 11 filing and no plan on EDGAR; Hospitality Investors Trust and GWG have effective plans; DiversyFund and USQ Core are winding down with positive reported equity; Lodging Fund REIT III has no event at all. A single label, “failed vehicle,” hides all of that.

CSV · 72 rows

Worthless securities deduction: the Code, regulation and IRS text, and what six failed or failing vehicles' SEC filings say about their holders

72 rows: the text of 26 U.S.C. 165, 1211, 1212 and 6511, 26 CFR 1.165-1 and 1.165-5, IRS Publication 550 and the Form 8949 instructions, and the Silver Star, Hospitality Investors Trust, GWG Holdings, DiversyFund, Lodging Fund REIT III and USQ Core filings with accession numbers, plus our date arithmetic.

A non-traded REIT, a business development company or a retail bond has a different problem from a stock that traded on an exchange: there is no last trade, no delisting notice and often no filing at all. This page does two things. It sets out what the Code, the regulations and IRS Publication 550 require, with the citation next to each statement. Then it reads six vehicles’ own SEC filings, in a table, for the one thing the rules turn on: what the issuer has said about the holders’ securities. Our companion pages cover tax-loss harvesting for illiquid real estate, by instrument, and the wash sale rule for tenders; this one is about the worthlessness test itself.

This is analysis of public documents, not investment, legal or tax advice. The deduction belongs to the holder’s own return and facts. We say what the texts require and what the filings show; we never say that a security is worthless.

What the rules say, line by line

Every row below is quoted from the text we saved: the 2024 edition of the U.S. Code from the Government Publishing Office, the Code of Federal Regulations (April 1, 2024 edition), IRS Publication 550 (2025) and the Instructions for Form 8949 (2025).

QuestionWhat the text saysSource
Is a loss deductible at all?“There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.”26 U.S.C. §165(a)
Which losses can an individual deduct?Limited to “losses incurred in any transaction entered into for profit, though not connected with a trade or business,” among others.26 U.S.C. §165(c)(2)
What happens when a security becomes worthless?“If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset.”26 U.S.C. §165(g)(1)
What is a “security”?“(A) a share of stock in a corporation; (B) a right to subscribe for, or to receive, a share of stock in a corporation; or (C) a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form.”26 U.S.C. §165(g)(2)
Does it have to be wholly worthless?“If any security which is a capital asset becomes wholly worthless at any time during the taxable year, the loss resulting therefrom may be deducted under section 165(a) but only as though it were a loss from a sale or exchange, on the last day of the taxable year, of a capital asset.”26 CFR §1.165-5(c)
Is a market decline enough?A holder “shall not be allowed any deduction under section 165(a) on account of mere market fluctuation in the value of such security.”26 CFR §1.165-5(f)
What must the loss look like?“A loss must be evidenced by closed and completed transactions, fixed by identifiable events, and ... actually sustained during the taxable year.”26 CFR §1.165-1(b)
Which year?“A loss shall be allowed as a deduction under section 165(a) only for the taxable year in which the loss is sustained.”26 CFR §1.165-1(d)(1)
What is the limit on a capital loss?A taxpayer other than a corporation may deduct capital losses to the extent of capital gains “plus (if such losses exceed such gains) the lower of” $3,000 ($1,500 if married filing separately) or the excess of losses over gains.26 U.S.C. §1211(b); §165(f)
What happens to the rest?An excess net long-term capital loss “shall be a long-term capital loss in the succeeding taxable year,” and an excess net short-term capital loss a short-term capital loss in the succeeding year.26 U.S.C. §1212(b)(1)
How is it reported?“Report worthless securities on Form 8949, Part I or Part II, whichever applies.” The Form 8949 instructions list “Worthlessness of a security” among the transactions individuals report on the form.IRS Publication 550 (2025); Instructions for Form 8949 (2025)

Two points about this table. First, the “last day of the taxable year” rule is the same in the statute, the regulation and Publication 550, so it is the text itself, not our gloss. Publication 550 adds the practical consequence: the rule “affects whether your capital loss is long-term or short-term.” Second, the Instructions for Form 8949 do not repeat the last-day rule; they list worthlessness of a security among the transactions to report. The last-day rule comes from §165(g)(1) and Publication 550.

Five questions the rules ask of a failed-vehicle holding

1. Is the holding a “security” in the statute’s sense? The Code lists stock in a corporation, rights to subscribe for or receive such stock, and debt “issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form” (26 U.S.C. §165(g)(2)). The regulation repeats the debt branch as “evidence of indebtedness to pay a fixed or determinable sum of money” issued “with interest coupons or in registered form” (26 CFR §1.165-5(a)(3)). Two things follow for non-traded vehicles. A share of a Maryland corporation fits the first branch on its face, and each filing below names the issuer’s form. A share of an LLC or a statutory trust is not “a share of stock in a corporation” on the statute’s wording; DiversyFund’s auditor describes its issuer as “a Delaware limited liability company, taxed as a corporation,” and USQ Core says it is “organized as a statutory trust under the laws of the State of Delaware.” We found no rule in the saved texts that settles those two cases. For a retail bond, “in registered form” is a tax term; GWG’s Form 15 lists “L Bonds” among the classes of securities it covers (accession 0001213900-24-000028), but a Form 15 about SEC reporting does not answer whether a particular bond was issued in registered form under §165(g)(2)(C).

2. Is it wholly worthless? The regulation says “wholly worthless,” and Publication 550 says “completely worthless” (26 CFR §1.165-5(c); IRS Publication 550, 2025). It also bars a deduction for “mere market fluctuation in the value” of the security (26 CFR §1.165-5(f)). That is why a falling NAV, a suspended repurchase program or a missed dissolution date are not themselves the test. Our page on how crowdfunding losses are timed covers the NAV-decline cases.

3. What identifiable event fixes the loss, and in which year? The regulation asks for “closed and completed transactions, fixed by identifiable events” (26 CFR §1.165-1(b)) and allows the deduction “only for the taxable year in which the loss is sustained” (26 CFR §1.165-1(d)(1)). The same regulation has a reimbursement rule written for casualties and similar events: where there is “a claim for reimbursement with respect to which there is a reasonable prospect of recovery,” no portion of the loss is sustained “until it can be ascertained with reasonable certainty whether or not such reimbursement will be received” (26 CFR §1.165-1(d)(2)(i)). That text is about reimbursement claims, and whether it reaches a creditor recovery in a plan is a question for the adviser. What the text does show is that the regulation names completed transactions, not filings: a petition by itself is a filing (our reading), and the filings below differ on what has closed.

4. Was the security abandoned instead? The regulation says a security that “becomes wholly worthless includes a security ... that is abandoned,” that “to abandon a security, a taxpayer must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for the security,” and that “all the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift” (26 CFR §1.165-5(i)(1)). It applies to abandonments “after March 12, 2008” (26 CFR §1.165-5(i)(2)); Publication 550 says the same (IRS Publication 550, 2025). We found no IRS guidance in the saved texts beyond this regulation and Publication 550 that tells a holder of a non-traded share how to carry out a surrender. For Silver Star specifically, Section 12(j) of the Exchange Act, quoted in SEC Release No. 106667, bars brokers and dealers from effecting a transaction in a security whose registration is revoked, so how a holder would surrender a share through a broker is a question for counsel.

5. How long is the window to claim? The general refund period is “3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later” (26 U.S.C. §6511(a)). For a claim based on “a loss from worthlessness of a security” under §165(g), “the period shall be 7 years from the date prescribed by law for filing the return for the year with respect to which the claim is made” (26 U.S.C. §6511(d)(1)). Publication 550 says to file Form 1040-X “within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later.” For tax year 2026, an April 15, 2027 due date plus 7 years is April 15, 2034, a Saturday (our arithmetic; the date that applies to a given return is the adviser’s call). For tax year 2023, the year GWG’s plan became effective, the same arithmetic gives April 15, 2031.

What six vehicles’ filings say about their holders

The rules turn on events, so we read what each issuer itself has filed. The table keeps the issuer’s words verbatim and adds a column for what the document does not say. “Event” means an event the filing documents; it is not our finding that any security is worthless.

Vehicle and issuer formEvent on fileWhat the filing says about holders (verbatim)Not in the filing
Silver Star Properties REIT, Inc. (formerly Hartman Short Term Income Properties XX, Inc.); a Maryland corporation per SEC Release No. 106667Chapter 11 petition filed May 28, 2026, N.D. Texas, Case No. 26-42316-mxm11 (Form 8-K, 0001437749-26-019764); SEC revoked registration of every class effective October 15, 2026 (Release No. 106667; EDGAR 9999999997-26-001632)“Shareholders should understand that under Chapter 11, creditors have priority over equity. Given the Company’s balance sheet, there is significant risk that existing equity may be impaired or cancelled.” Assets about $100 million, liabilities about $75 million (press release, Exhibit 99.1).No plan, no cancellation of shares, no valuation after the June 5, 2026 release. The SEC order revokes registration; its finding concerns missing reports.
Hospitality Investors Trust, Inc.; MarylandPrepackaged plan effective June 30, 2021 at 11:59 p.m. Eastern Time (Form 8-K filed July 1, 2021, 0001104659-21-087898)Each share of Old Common Stock “was cancelled and (except for 37,620 shares of Old Common Stock held by the Brookfield Investor) exchanged for a right to receive contingent cash payments (each such right, a “CVR”).” Maximum per CVR $6.00; 40,050,332.091 CVRs held by former holders.The 8-K says the cap “may allow a former holder of a share of Old Common Stock with a tax basis greater than $6.00 that received a CVR to claim a loss for the difference. However, the law is uncertain.” It does not say which year.
GWG Holdings, Inc.; a Delaware corporation (Form 8-K cover)Plan confirmed June 20, 2023; effective August 1, 2023 (Form 8-K, 0001213900-23-062120); Form 15 filed January 2, 2024 (0001213900-24-000028)“All securities issued by the Company, including the Company’s common stock, preferred stock and debt securities (including all L bonds) were cancelled. Holders of such cancelled securities were delivered interests (“New WDT Interests”) in GWG Wind Down Trust.” Before the effective date: “under the Plan such stock has no underlying asset value” (8-K, 0001213900-23-051587).Form 15 shows “Zero” holders of record and ends GWG’s own reports. The 8-Ks do not say how any holder treated the cancellation.
DF Growth REIT, LLC (DiversyFund Growth REIT I); a Delaware LLC “taxed as a corporation”Term extended to December 31, 2025; FY2025 Form 1-K filed May 1, 2026 (0001213900-26-050481); Form 1-SA for June 30, 2026 filed September 28, 2026 (0001213900-26-104093)“The Company is now in its winding up period.” June 30, 2026 balance sheet (unaudited): total assets $92,282,301; total liabilities $54,449,522; Total Members’ Equity $37,832,779.No liquidating distribution and no valuation per share. Equity is positive on the filer’s own books. Growth REIT II (also an LLC): “The new dissolution date is December 31, 2027” (Form 1-U, 0001213900-26-104852).
Lodging Fund REIT III, Inc.; a Maryland corporation, private offering of shares at $10.57No bankruptcy or plan. Board authorized an exit strategy on May 7, 2024; FY2025 Form 10-K filed May 15, 2026 (0001104659-26-062807); Q1 2026 10-Q still unfiled per Form NT 10-Q/A of August 19, 2026 (0001104659-26-098712)The board “authorized management to pursue an exit strategy and position the Company for a sale or merger of the Company.” Total stockholders’ equity $5,493,508 at December 31, 2025.No event of any kind that closes a position. The filing gives no value for the shares other than the $10.57 offering price.
USQ Core Real Estate Fund; a Delaware statutory trustPlan of Liquidation approved October 29, 2025; annual report N-CSR filed June 2, 2026 (0001398344-26-010165)“The first liquidating distribution payment was made on December 30, 2025 in the amount of $0.56 per share. On March 6, 2026, the Fund made a second distribution payment of $4.886 per share.” Repurchases suspended; “periodic liquidating distributions will be made.”Money is being paid back, the opposite of a no-recovery record. The fund’s shares are not shares of a corporation on their face.

What each row shows, and what it leaves open

Silver Star. The only company filing on EDGAR for 2026 is the June 8 Form 8-K; the other 2026 item is the October 15 revocation. The company has said that “creditors have priority over equity” and that equity “may be impaired or cancelled”; it has not said that equity is cancelled. The petition was filed 142 days before October 17, 2026 (our arithmetic). Our Silver Star revocation page covers the order and the missing reports; what matters here is that no filing yet closes the position one way or the other. Whether the company keeps any reporting duty after the revocation is open on that page, so the bankruptcy docket may be where the next event appears first.

Hospitality Investors Trust. The plan took effect on June 30, 2021, and the old shares were cancelled in exchange for CVRs (Form 8-K filed July 1, 2021). The CVRs “will not be transferable, except in limited instances,” and the maximum payment per CVR is $6.00. The company itself said the cap “may allow” a loss for holders with a basis above $6.00 and that “the law is uncertain.” That sentence is the clearest example in any filing we read of an issuer telling holders to ask their own advisers, and it is a reminder that a cancellation for a right to payment is a different record from a cancellation for nothing. See what happened to Hospitality Investors Trust.

GWG Holdings. The plan cancelled the common stock, the preferred stock and the L Bonds on August 1, 2023, and the holders of each “were delivered interests” in a Texas liquidating trust; the June 2023 8-K lists the common stock’s share as the “New Series E WDT Interests.” The same 8-K told stockholders the stock had “no underlying asset value” under the plan. GWG then filed Forms 15 on January 2, 2024. That matters here in two ways: debt (L Bonds) and equity (common) were treated in the same plan under different classes, and the issuer’s reports ended, so a holder’s record of events now sits with the trust. See what happened to GWG Holdings.

DiversyFund Growth REIT I and II. Growth REIT I says it is in its winding up period; its unaudited June 30, 2026 balance sheet shows members’ equity of $37,832,779. Growth REIT II’s equity was $4,671,022 on 1,134,678 shares at the start of 2026 (Form 1-SA, 0001213900-26-104096). Both issuers are LLCs, which is the §165(g)(2)(A) question from the section above. Our DiversyFund wind-down page has the cash, notes payable and extension history.

Lodging Fund REIT III. This is the control case: a Maryland corporation with positive stockholders’ equity of $5,493,508, an authorized exit strategy and a $10.57 offering price. Nothing in the filings fixes a loss, and the late-filing notices mean even the numbers are behind. See Lodging Fund REIT III’s late filings.

USQ Core Real Estate Fund. A liquidation that pays $0.56 and $4.886 a share is the opposite of a no-recovery record, and the fund is a statutory trust, not a corporation. It is in the table to show what a wind-down with payments looks like in a filing. See USQ Core’s liquidation.

Three patterns in the filings

  1. Cancelled in exchange for something. Hospitality Investors Trust (a CVR) and GWG (trust interests). The abandonment test in 26 CFR §1.165-5(i)(1) speaks of receiving “no consideration in exchange for the security,” and the filings show consideration delivered. Which tax characterization applies is the adviser’s question.
  2. Filed for bankruptcy, no plan yet. Silver Star. The company’s own words are a risk statement, not an outcome. The regulation’s test is a transaction “fixed by identifiable events” (26 CFR §1.165-1(b)).
  3. Winding down or liquidating with positive reported equity. DiversyFund, Lodging Fund REIT III and USQ Core. The filings point to a process, and in USQ’s case to payments, not to a closed loss.

This page cannot tell a reader which pattern their own holding is in. The share class, the date bought, the basis and the documents received from the issuer or the court are in the holder’s records, not on EDGAR.

What a holder can do with this

  • Write down the event, the date and the document. The regulation turns on “identifiable events” in a taxable year (26 CFR §1.165-1(d)(1)); the document is what shows them. For a plan, that is the confirmation order and the effective-date notice. For a liquidation, it is the payment notices.
  • Confirm what you hold and who issued it. Share class, issuer name and legal form, and whether the position is stock, a note or an interest in a trust or LLC. The statute’s categories differ (26 U.S.C. §165(g)(2)).
  • Collect your basis records now. The amount of a loss is measured from adjusted basis (26 U.S.C. §165(b)); purchase confirmations, reinvested distributions and any return-of-capital notices are the inputs.
  • Note whether you received anything. A CVR, a trust interest or a liquidating payment is consideration; the abandonment rule’s text turns on receiving none (26 CFR §1.165-5(i)(1)).
  • Keep the calendar in front of you. The last day of the taxable year is the date the Code uses (26 U.S.C. §165(g)(1)), and the refund window for a worthless security is 7 years from the return due date (26 U.S.C. §6511(d)(1)). Our year-end tax calendar lists the other dates.
  • Do not create a second problem in the same year. If a holder sells at a loss and buys back, the wash sale rule in 26 U.S.C. §1091 may apply; see our wash sale page.

Questions to ask a tax adviser (bring the filings named above):

  1. Is my holding a “security” under 26 U.S.C. §165(g)(2), given the issuer’s legal form?
  2. Is there an identifiable event, in which tax year, that fixes the loss under 26 CFR §1.165-1(b) and (d)(1)?
  3. Did I receive any consideration (a CVR, trust interests, a payment) that changes the analysis?
  4. Is abandonment under 26 CFR §1.165-5(i) a route open to me, and how would it be documented?
  5. If the event was in an earlier year, is a refund claim still open under 26 U.S.C. §6511(d)(1)?
  6. How do capital loss limits and carryovers (26 U.S.C. §1211(b), §1212(b)) apply to my return?

This is analysis of public documents, not investment, legal or tax advice.

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All figures and quotations come from documents read and saved on October 17, 2026: 26 U.S.C. §165, §1211, §1212 and §6511 (2024 edition, U.S. Government Publishing Office, govinfo.gov); 26 CFR §1.165-1 and §1.165-5 (Code of Federal Regulations, April 1, 2024 edition, govinfo.gov); IRS Publication 550 (2025) and the Instructions for Form 8949 (2025) from irs.gov; SEC Release No. 106667 (October 14, 2026; EDGAR accession 9999999997-26-001632); Silver Star Properties REIT, Inc. (CIK 1446687) Form 8-K filed June 8, 2026 with Exhibit 99.1 (0001437749-26-019764); Hospitality Investors Trust, Inc. (CIK 1583077) Forms 8-K filed May 19, 2021 (0001104659-21-069107) and July 1, 2021 (0001104659-21-087898); GWG Holdings, Inc. (CIK 1522690) Forms 8-K filed June 26, 2023 (0001213900-23-051587) and August 2, 2023 (0001213900-23-062120) and Form 15 filed January 2, 2024 (0001213900-24-000028); DF Growth REIT, LLC (CIK 1750695) Form 1-K (0001213900-26-050481) and Form 1-SA (0001213900-26-104093); DF Growth REIT II, LLC (CIK 1824154) Form 1-SA (0001213900-26-104096) and Form 1-U (0001213900-26-104852); Lodging Fund REIT III, Inc. (CIK 1745032) Form 10-K (0001104659-26-062807) and Form NT 10-Q/A (0001104659-26-098712); USQ Core Real Estate Fund (CIK 1691570) Form N-CSR (0001398344-26-010165). Our arithmetic is marked in the text. Compiled by CrowdfundedWealth. This is analysis of public documents, not investment, legal or tax advice.

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