If a brokerage fails, your investments are almost certainly not gone. Federal law requires brokerages to hold your securities and cash separately from their own money, so in most failures the trustee simply moves customer accounts in bulk to a healthy firm and you keep trading under a new login. When something is missing, the Securities Investor Protection Corporation (SIPC) covers up to $500,000 per customer, including a $250,000 cash sublimit. The risks worth knowing about are narrow: balances above the coverage ceiling, holdings that don’t qualify as protected securities, and claim deadlines you can’t miss.
Why Your Account Usually Survives Intact
The first protection has nothing to do with insurance. SEC Rule 15c3-3, the Customer Protection Rule, requires every brokerage to keep possession or control of your fully-paid securities and to segregate customer cash rather than using it as working capital.1U.S. Securities and Exchange Commission. Key SEC Financial Responsibility Rules Your holdings are not mixed in with the firm’s debts. When the firm closes, a court-appointed trustee’s first move is to transfer customer accounts as a block to another brokerage. Most customers notice little beyond a change of address for their statements.
SIPC becomes relevant when segregation has broken down, through sloppy recordkeeping or fraud, and the firm cannot return everything it was supposed to be holding.
What SIPC Covers and How Much
SIPC is a nonprofit membership corporation funded by assessments on its member broker-dealers.2Office of the Law Revision Counsel. 15 U.S. Code 78lll – Definitions It restores what the failed firm owed you, up to $500,000 per customer, with no more than $250,000 of that applied to cash.3Securities Investor Protection Corporation. What SIPC Protects Stocks, bonds, Treasury securities, mutual funds, and certificates of deposit all count toward the $500,000 ceiling. “Cash” means money sitting in your account from a sale or waiting to be invested.
SIPC does not cover investment losses. If you bought a stock at $50 and it was worth $10 when the firm failed, your protection is based on the $10 figure. SIPC restores what the firm owed you, not what you wish your portfolio was worth.
Non-U.S. residents with accounts at SIPC-member firms get the same coverage as domestic customers.3Securities Investor Protection Corporation. What SIPC Protects
Separate Capacities Multiply the Limit
The $500,000 cap applies per customer, per “separate capacity.” Different types of accounts at the same brokerage each get their own independent coverage. Separate capacities include individual accounts, joint accounts, IRAs and Roth IRAs (each counted separately), trust accounts, corporate accounts, and estate or guardianship accounts.
A married couple with an individual account for each spouse and one joint account at the same brokerage has up to $1.5 million in combined SIPC coverage, because each account falls under a different capacity.4Securities Investor Protection Corporation. Investors with Multiple Accounts Two individual accounts in the same person’s name at the same firm, however, are combined and share a single $500,000 limit.
Excess Coverage Above the SIPC Limit
Many large brokerages carry supplemental insurance that activates above standard SIPC limits, often underwritten through Lloyd’s of London or other commercial insurers. These policies can add a billion dollars or more in aggregate coverage across all customer accounts at the firm. The arrangement is private, not required by law, so coverage amounts, per-customer caps, and eligible assets vary. If you hold significant assets at a single brokerage, ask what excess coverage the firm carries and read what it actually covers.
What SIPC Does Not Cover
Several exclusions catch people off guard, especially investors whose accounts hold more than plain stocks and bonds.
Commodity futures contracts and foreign currency trades fall outside SIPC’s statutory definition of securities and are not protected. There is a narrow exception for futures held in a portfolio margining account carried as a securities account.3Securities Investor Protection Corporation. What SIPC Protects
Limited partnerships, fixed annuities, and other investment contracts that are not registered with the SEC under the Securities Act of 1933 are excluded.3Securities Investor Protection Corporation. What SIPC Protects
Cryptocurrency and digital assets are the exclusion that trips up the most people right now. Even if a token is technically a security, it has to be registered with the SEC to qualify. Unregistered digital asset securities are explicitly excluded, even when held at a SIPC-member firm.3Securities Investor Protection Corporation. What SIPC Protects If your brokerage offers crypto trading alongside traditional investments, only the traditional side has SIPC coverage.
Cash swept into an FDIC-insured bank deposit program is another handoff worth understanding. Once the cash leaves your brokerage account and lands at the bank, SIPC no longer covers it. FDIC does, up to $250,000 per depositor at each participating bank. Check your account settings to see which program your firm uses and how many banks participate in the sweep, because that count determines your total FDIC coverage.
How You Actually Get Your Assets Back
When SIPC decides a member firm is in trouble, it asks a federal court to appoint a trustee. The trustee’s first priority is transferring customer accounts in bulk to a solvent brokerage. If your account goes through a bulk transfer, you don’t need to do anything, and you don’t need to file a claim.
For accounts that can’t be cleanly transferred, the trustee calculates each customer’s “net equity”: the total value of your securities and cash on the filing date, minus any debts you owed the firm, such as margin loans.2Office of the Law Revision Counsel. 15 U.S. Code 78lll – Definitions The filing date controls, not the date you last checked your account. If the market moved between the two, the filing-date value is what counts.
Remaining customer property is distributed proportionally among claimants based on net equity, so the first callers don’t drain the pool. Where the pool falls short, SIPC advances funds up to the $500,000 limit per customer. The trustee tries to return the actual securities you held, buying them on the open market if necessary. When only cash is owed, you get a check.
If you had a margin loan when the firm failed, the trustee subtracts that debt from your account value before determining your claim. You still owe the balance. The trustee may use securities in your account to satisfy the debt, or the obligation transfers along with your account to the receiving brokerage. Either way, margin borrowing reduces the net amount SIPC can restore.
In straightforward cases with accurate firm records and no fraud, customers generally receive at least some of their assets within one to three months of filing a completed claim.5Securities Investor Protection Corporation. The Investor’s Guide to Brokerage Firm Liquidations Fraud cases take much longer. If the firm’s records are a mess or its principals were running a scheme, expect the timeline to stretch well beyond that baseline.
Filing a Claim and the Deadlines That Matter
You only need to file a claim when your account can’t be transferred automatically or when you believe the transferred assets are incomplete. Pull your most recent account statements and trade confirmations first; they are the primary evidence of what the firm was holding for you. Save any correspondence from the firm or regulators about the insolvency.
Claim forms are available on the trustee’s website and are also mailed to every customer who held an account within the prior 12 months.6Securities Investor Protection Corporation. How The Claims Process Works File electronically or mail a signed form. List every security you held, including ticker symbols, so the trustee can match your claim against the firm’s books. Calculate your net equity by starting with the total value of securities and cash and subtracting margin debt or anything else you owed the firm.
There are two deadlines, and they work differently. The first is a court-set cutoff, typically around 60 days after the trustee publishes notice of the liquidation. Claims filed after this date can still be allowed, but they lose priority and will not be paid from the pool of recovered customer property; the trustee satisfies them from SIPC’s own funds instead, in cash or securities as is most economical.7Office of the Law Revision Counsel. 15 U.S. Code 78fff-2 – Special Provisions of a Liquidation Proceeding
The second is a hard bar date: six months from the trustee’s first notice. Claims filed after that date are disallowed entirely, with narrow exceptions for government entities, minors, and people under legal guardianship.7Office of the Law Revision Counsel. 15 U.S. Code 78fff-2 – Special Provisions of a Liquidation Proceeding Missing the six-month deadline is one of the few ways to permanently lose your claim. Treat it as non-negotiable. If the trustee denies your claim, you can seek judicial review.
Tax Treatment of Any Actual Losses
If securities became completely worthless because of the failure, the IRS treats them as sold on the last day of the tax year for zero. That produces a capital loss, long-term if you held the securities for more than a year and short-term otherwise.8Internal Revenue Service. Capital Gains, Losses, and Sale of Home Report the loss on Form 8949.
Capital losses first offset any capital gains for the year. If your losses exceed your gains, you can deduct up to $3,000 of the excess against ordinary income, or $1,500 if married filing separately.9Internal Revenue Service. Topic No. 409 Capital Gains and Losses Anything left over carries forward to future years indefinitely, so a large one-time loss may take years to fully deduct.
Starting in tax year 2026, personal theft loss deductions are scheduled to return after being suspended by the Tax Cuts and Jobs Act for 2018 through 2025. If your losses came from fraud rather than ordinary insolvency, you may be able to claim a theft loss deduction under the older rules, which allow deductions exceeding 10% of adjusted gross income. The area is evolving as Congress considers extending the TCJA provisions, so talk to a tax professional about your specific situation.
Check Your Protection Before You Need It
Every registered broker-dealer is required by law to be a SIPC member, with limited exceptions for firms that exclusively sell mutual fund shares, variable annuities, or insurance products. Confirm your firm’s membership through the online directory at sipc.org.10Securities Investor Protection Corporation. List of Members Member firms are also required to display that status to customers.
If you hold more than $500,000 at one brokerage, look at whether your account structure takes advantage of the separate-capacity rules. Adding an IRA or trust account alongside your individual account multiplies your SIPC coverage. For amounts well above what SIPC and excess coverage reach, spreading assets across multiple brokerages removes single-firm risk entirely.