Bankrupt stock- tax implications

Technically speaking... you can only get the write-off once the stock is sold or once all your ownership has been extinguished. This is done via the legal process of bankruptcy.

You need to look into the status of the stock. If the stock is still valid - you may have some issues taking the write-off now. What if you actually got something out of the bankruptcy? You still own the stock until the court says you don't.

One thing we recommend to our clients is, in these situations, to try to sell the stock for $1 total (not per share).

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I hope you tell them to not sell the stock to a related party.

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Yes, usually it is their financial adviser that buys it (assuming the adviser is not related to them).

I did have a new client show up once that had already sold stock like this to his son, and the son sold a like amount of the same stock to his father. They were in for a surprise!

You cannot take a loss on stock (among other things) sold to a related party. The loss is basically carried over to the new owner. When the new owner sells the stock, if he has a gain, then he can use the old loss to offset his gain, but that's it.

The situation I had was pretty straight-forward. Father and son each owned 1,000 shares in a company, the shares were inherited from a third party. The basis in the shares for each of them was like $16,000. They sold each other the shares for $1 for the entire block. So they each had a loss of $15,999. They each had a basis in their new block of stock of $1.

The company eventually did, through the bankruptcy process, wipe out the stock in the following year. They received nothing in return. Therefore, each of them had a loss of $1 they deducted in that following year.

If the company had turned it around and the stock was later sold to a non-related party for say $2,000, the gain would be $1,999, but, you can use that suspended loss to offset the gain, so no gain would have been reported. At that point, any unused loss is, well, lost.