US Tax Return Preparation for Expats: Worthless UK Shares

For a US citizen resident in the UK whose UK startup shareholding has failed, the loss is recognised twice under two different rulebooks that rarely agree. HMRC allows an elective negligible value claim under section 24 TCGA 1992, which you can backdate. The IRS allows no election at all: under section 165(g) the loss lands in the specific year the security became wholly worthless, and nowhere else.

That single divergence — elective and backdatable in the UK, fixed and non-elective in the US — is the reason so many cross-border investment losses end up either claimed in the wrong US year, claimed twice, or quietly abandoned. It is also why US tax return preparation for expats holding private UK equity is a specialist exercise rather than a data-entry one. At Jungle Tax we see this most often in catch-up filings, where the year the shares died is already several returns back and the client assumes the loss is gone. Usually it is not.

What actually happens when a UK startup fails: the two parallel timelines

Picture the common fact pattern. A US citizen living in London subscribes for ordinary shares in a UK private company in, say, 2020 — often alongside EIS or SEIS relief. The company trades, struggles, runs out of runway. At some point in 2023 the board concludes there is no equity value left; in 2024 an insolvency practitioner is appointed; in 2025 the company is struck off or dissolved. The investor, meanwhile, has not filed US returns for several of those years.

Two clocks are running, and they are not synchronised.

The UK clock: an election you control

Under section 24(2) TCGA 1992 the owner of an asset that has become of negligible value may claim to be treated as having sold and immediately reacquired it at its negligible value. HMRC's Capital Gains Manual at CG13125 confirms the two features that matter most here. First, negligible value is not statutorily defined — HMRC's working test is that the asset is "worth next to nothing". Second, and critically, there is no requirement to make the claim within any specified period of the asset having become of negligible value. The claim can be made years later, provided you still own the asset when you make it.

That last condition is the trap most UK advisers flag: the asset must still exist. Once the company is dissolved and the shares are extinguished, there is nothing left to make a negligible value claim over. You then fall back on an actual disposal at nil under section 24(1), which lands in the year of dissolution rather than a year of your choosing.

The UK claim can also be backdated. HMRC's Helpsheet HS286 allows you to specify an earlier deemed disposal date, provided that earlier time is not more than two years before the start of the tax year in which the claim is made, and provided the shares were in fact of negligible value at that earlier date and you owned them throughout. So a claim made in 2026/27 can reach back to 6 April 2024 — no further.

The US clock: a fact you must find, not a date you may choose

Section 165(g) of the Internal Revenue Code operates on an entirely different logic. If a security that is a capital asset becomes wholly worthless during the taxable year, the loss is treated as a loss from the sale or exchange of a capital asset on the last day of that taxable year. There is no election, no claim form, and no ability to choose a more convenient year. The loss belongs to the year worthlessness objectively occurred, and if you claim it in the wrong year the IRS can — and does — disallow it while the correct year quietly runs out of road.

The US test is also stricter in substance. Partial worthlessness earns nothing. The shares must have neither liquidating value nor potential future value, and the taxpayer must be able to point to an identifiable event fixing that loss: cessation of trade, appointment of an administrator or liquidator, a formal statement of affairs showing creditors exceeding assets, a members' or creditors' voluntary liquidation resolution, or the return of nothing to shareholders on a distribution. A company that is merely failing, or trading at a loss, or has raised a down round, has not produced a worthless security.

US vs UK: how the same failed shareholding is treated on each side

Issue	UK (HMRC)	US (IRS)
Governing rule	Negligible value claim, s24(2) TCGA 1992	Worthless securities, s165(g) IRC
Is it elective?	Yes — you claim, and you may decline to	No — the loss arises in the year of worthlessness whether or not you report it
Threshold	"Worth next to nothing" — some residual value tolerated	Wholly worthless — no liquidating and no potential future value
Choice of year	Year of claim, or backdated up to two years before the start of the tax year of claim	Fixed: the year the identifiable event occurred
Deemed disposal date	Date specified in the claim	Last day of the tax year of worthlessness
Must the asset still exist?	Yes — dissolution defeats the claim	No — worthlessness is a question of fact, not of continued existence
Character of loss	Capital loss; potentially income relief via share loss relief	Capital loss only; long-term if held over one year at year end
Relief against ordinary income	Share loss relief under s131 ITA 2007 for qualifying unquoted trading company shares	Capped at $3,000 per year against ordinary income; s1244 unavailable for foreign corporations
Time limit to claim	No limit on the claim itself; loss must still be notified within four years of the end of the tax year	Extended seven-year refund window under s6511(d)(1)
Currency	Sterling throughout	Basis and loss computed in USD at historic rates — the two loss figures rarely match

Why the US loss is almost never the same number as the UK loss

Even when both jurisdictions agree the shares are dead, they will rarely agree on the size of the loss. The US measures basis and proceeds in dollars, translated at the exchange rate prevailing on each relevant date. A subscription of £100,000 made when sterling was strong produces a materially larger dollar basis than the same subscription made at a weaker rate — and the entire loss is a dollar loss.

The practical consequence is that a UK investor who lost, say, £250,000 may have a US capital loss meaningfully above or below the sterling figure. We routinely see divergences of fifteen to twenty-five per cent on subscriptions made across several funding rounds at different rates. The IRS's guidance on foreign currency and exchange rates is the starting point, but for a multi-tranche private investment the work is a per-tranche basis reconstruction, not a single average rate applied to a total.

The EIS and SEIS complication

Most UK angel and seed investments by UK-resident Americans carry EIS or SEIS relief. That relief has two US consequences that generalist preparers miss.

• UK income tax relief does not reduce US basis. The 30% EIS or 50% SEIS income tax relief is a UK relief against UK tax. It does not, of itself, reduce the dollar cost basis of the shares for US purposes. Some preparers net it off by analogy to a purchase price adjustment; that is generally wrong and understates the US loss.
• UK share loss relief against income has no US mirror. Section 131 ITA 2007 lets a UK investor set the capital loss on qualifying unquoted trading company shares against general income. The US has no equivalent for foreign shares. Section 1244 — the provision that converts up to $50,000 ($100,000 on a joint return) of small business stock loss into an ordinary loss — is restricted to stock in a domestic corporation. A UK company does not qualify, full stop. Neither does section 1202 QSBS treatment.

The asymmetry is stark and worth stating plainly: in the UK the loss may shelter income at 45%; in the US the same loss shelters capital gains without limit but only $3,000 of ordinary income per year, with the remainder carried forward indefinitely. For a client with no US capital gains, a seven-figure UK loss can take a very long time to absorb.

Is the failed company a PFIC? The question that changes everything

This is the single most consequential issue in the whole exercise, and it is the one the UK-facing literature never raises. A foreign corporation is a passive foreign investment company if it meets an income or an asset test based on passive income and passive assets. An early-stage operating company usually fails both tests comfortably while it is trading. A dying company frequently does not.

Consider the typical wind-down: the company ceases trading, sells its IP, sits on a residual cash balance, earns a little interest, and holds nothing else. In that year, cash is a passive asset and interest is passive income. The company can become a PFIC in its final years even though it never was one during its operating life — and under the once-a-PFIC-always-a-PFIC rule, that taint can attach to your shares for the remainder of your holding period unless a purging election is made.

Why it matters: under the default section 1291 excess distribution regime, a disposition of PFIC shares produces punitive treatment on gains — and no deduction at all for losses. A loss on a section 1291 fund is simply not recognised. If your failed UK shares are PFIC-tainted at the point of worthlessness, the US loss you were counting on may not exist. Determining this requires the company's accounts for each year in question, not an assumption. The Form 8621 filing requirements also bring their own reporting obligations, independent of whether any loss is allowed.

The seven-year rule: why late filers are often better off than they think

Here is the provision that rescues most of the catch-up cases we handle. The ordinary window to claim a refund is the later of three years from filing or two years from payment. But section 6511(d)(1) extends that window to seven years where the overpayment arises from the deductibility of a loss on a security that became wholly worthless under section 165(g).

Read that against the UK position and a striking result emerges. HMRC will let you backdate a negligible value claim by at most two years. The IRS will let you go back to a return whose original due date was up to seven years ago. For a UK-resident American who stopped filing US returns in the middle of a startup's collapse, the US side of the loss is frequently still live long after the UK side has closed.

Two cautions. The extended period applies to wholly worthless securities only — partial worthlessness reverts to the standard three-year rule. And the seven-year window is a refund window; it does not by itself excuse the failure to file. Where returns are genuinely delinquent, the loss year usually needs to be brought in as part of a structured catch-up rather than a standalone amended return. Our IRS streamlined filing specialists handle exactly this sequencing.

How do you evidence worthlessness to IRS standard?

UK practitioners are used to a light-touch evidentiary standard: HMRC publishes a list of formerly quoted shares accepted as of negligible value, and for unquoted companies a short narrative plus the accounts often suffices. The IRS standard is higher, and the burden sits entirely with the taxpayer. Build the file before you file the return, not after the examination letter arrives.

• The identifiable event, dated. Companies House filings are gold here: the AA01 or DS01, the appointment of an administrator or liquidator, the gazette notice, the resolution to wind up. Each carries an unambiguous date.
• A statement of affairs or liquidator's report showing that creditors exceed realisable assets and that shareholders will receive nothing. This is the cleanest possible proof that there is no liquidating value.
• Evidence of no potential future value. The board minute recording that the company will not continue, the failed sale process, the lapse of the runway, the notice to employees.
• Your subscription documentation — share certificates, SH01s, EIS3 or SEIS3 certificates, and bank records for every tranche, with dates for currency translation.
• Correspondence with the company confirming no return to ordinary shareholders, particularly where preference shares absorbed the entire remaining value.

A note on liquidation preferences

This deserves its own flag because it drives so many outcomes. Where a company is sold or wound up and preferred shareholders absorb the whole of the proceeds, ordinary shares can be worthless even though the company itself realised value. That is a good fact for both jurisdictions — but the evidence has to show the waterfall, not just the headline transaction. A US examiner looking at a reported sale of the business will want to understand why the ordinary shareholder received nothing.

Reporting mechanics on each return

On the US return

Report the worthless security on Form 8949, flowing to Schedule D. Enter the acquisition and worthlessness details, with proceeds of zero, and use the code the instructions specify for worthless securities. Because the loss is deemed to arise on the last day of the tax year, the holding period runs to 31 December of that year — which means a shareholding acquired in, for example, March of the worthlessness year is still long-term if 31 December is more than a year later. In practice almost every startup loss is long-term.

Attach a short statement setting out the identifiable event and its date. This is not required by the form, but it materially reduces friction on a loss that will otherwise appear as an unexplained zero-proceeds disposal, particularly on an amended or late-filed return.

On the UK return

The negligible value claim is made in writing, typically in the additional information space or as an attachment, specifying the asset, the value claimed, and the deemed disposal date. The resulting loss is reported on the capital gains pages, and where share loss relief against income is claimed the entry moves to the relevant income tax loss box. Remember that the claim and the loss notification are technically two things — HMRC will accept them together, but a claim without a notified loss leaves the loss unallowable.

Sequencing the two claims when years are being filed late

Where a client is filing several US years at once, the order of operations matters more than any single technical point. The approach we use:

• Fix the US worthlessness year first. It is a fact, not a choice, and it anchors everything else. Establish it from the documentary record before deciding which years to file or amend.
• Test the seven-year refund window against that year. If the year is within it, the loss is recoverable. If it is not, examine whether the shares were only partially impaired earlier and became wholly worthless later — a later identifiable event may bring the loss back into range.
• Screen for PFIC status in the worthlessness year and every year of the holding period. Do this before promising a client a loss.
• Then, and only then, consider the UK claim. The UK backdating window is short and elective; the US year is fixed. Choosing a UK date that aligns with the US year, where the facts genuinely support it, keeps the two returns telling one coherent story and simplifies any future foreign tax credit position.
• Check the knock-on to EIS or SEIS relief. Where the company failed within the minimum holding period, income tax relief may be withdrawn — a UK cost that arrives at the same moment as the UK loss relief.

Divergent dates are not fatal. There is no rule that the UK and US must agree, and in many cases they cannot. But an unexplained divergence in a file that later comes under scrutiny is an avoidable problem, and coherent US-UK tax preparation should produce a documented rationale for each date rather than two unrelated filings.

What about loans to the company, and convertible notes?

Many founders and angels fund UK startups partly by loan or by advance subscription agreement rather than purely by equity. The analysis changes.

In the UK, a loan to a trader that becomes irrecoverable may attract relief under the qualifying loan provisions, which is a different claim from a negligible value claim on shares. In the US, a wholly worthless debt is deductible — but the character depends on whether it is a business or non-business bad debt. A non-business bad debt is a short-term capital loss regardless of how long it was held, which is materially worse than the long-term capital loss on the shares and cannot be netted against long-term gains at the same rate.

Convertible instruments that never converted require care: the question is whether you held debt or equity at the moment of worthlessness, and the answer determines both the character and the year. This is a common area where a generalist return preparer defaults to the wrong box.

Frequently missed points for high-net-worth investors

• The loss may be worth more than the tax on it. A large capital loss carryforward is a durable asset for anyone expecting a future liquidity event — a business sale, a property disposal, a portfolio rebalance. Establishing it correctly in a closed-off year is often worth several times the immediate refund.
• Foreign tax credits interact badly with losses. A capital loss can affect your foreign source income and therefore the credit limitation. Where you hold general or passive basket carryovers, running the loss without modelling the credit position can waste credits you cannot get back.
• The shares may still be reportable while worthless. A holding that has lost its value may still sit inside a reportable structure or account. Worthlessness does not automatically end an FBAR or Form 8938 obligation for related accounts — and where past years are being caught up, those forms need reviewing alongside the loss.
• Do not dissolve the company before making the UK claim. If a strike-off is imminent and a negligible value claim is available, the claim needs to be made while the shares still exist. This is one of the few genuinely time-critical actions in the whole exercise.
• Married filers domiciled differently. Where shares were subscribed jointly or by a non-US spouse, the US loss follows US ownership rules and may not track the UK position at all.

Getting it right on a late-filed return

The clients who come to us on this issue almost always arrive with the same story: the investment failed, someone mentioned a negligible value claim, and nobody addressed the US side because nobody in the chain looked at both systems. Several US years are outstanding. The assumption is that the loss has been lost.

More often than not it has not been. The seven-year refund window for wholly worthless securities is unusually generous, the identifiable event is usually documented at Companies House with a date you can prove, and the loss — once established — carries forward indefinitely against future US capital gains. What it needs is someone who will fix the worthlessness year on evidence, screen the PFIC risk honestly, rebuild the dollar basis tranche by tranche, and file the years in the right order. That is the work.

If you are a US citizen or green card holder in the UK holding shares in a company that has failed or is failing, and particularly if your US returns are behind, we would welcome a confidential conversation before anything is dissolved or filed. Our team prepares US and UK returns side by side for founders, executives and private investors with exactly this profile. Contact our cross-border team to arrange a discreet consultation, or explore our private client tax services to see how we work.