EToys Plans Bankruptcy Filing, Says Stock Worthless

Online retailer EToys said Monday that it will file for bankruptcy and advised shareholders its stock is “worthless.”

The once-promising toy seller had said this month that it was laying off all its employees after disappointing holiday sales crippled its operations. On Monday, EToys said it would shutter its Web site around March 8 and that it would file for protection from creditors under Chapter 11 of the Bankruptcy Code within 10 days.

EToys decided to file for bankruptcy after failing to find a buyer for the whole company, said spokesman Ken Ross.

The company’s stock fell 3 cents to 9 cents before trading was halted on the Nasdaq Stock Market. EToys closed at a peak price of $84.25 in October 1999.

The slim silver lining for EToys investors is that, even without bothering to sell the stock, their losses now may be deductible on their income-tax returns--and EToys made the process easier by publicly declaring its intent to go out of business.

Securities that lose all their value are deductible in the year they become worthless, tax experts say. For EToys investors, that means their losses would be taken on their 2001 tax returns, which will be due April 15, 2002.

To take a loss without selling, investors must prove a stock actually has no value--a task that is sometimes surprisingly difficult, since even stocks of companies that have declared bankruptcy may continue trading for a few pennies. Other times, trading in a security simply stops, and investors are left to prove that the company is truly out of business.

EToys’ announcement gives investors the proof they need to take the deduction, said Joel Framson, a Los Angeles financial planner and certified public accountant.

Investment losses can be used to offset realized investment gains, and thus lower a tax bill. If the losses are greater than the gains, or an investor has no gains, then up to $3,000 per year of the loss can be used to offset ordinary income.

Generally, any loss on an investment held less than one year is considered a short-term loss. But when it comes to worthless securities, the loss of value is considered to have happened on the last day of the year. So someone who bought the shares at the end of 2000 will be considered to have a long-term loss in 2001, even though EToys’ announcement occurred Monday.