Ten years ago, Elaine paid $10 per share for 2,000 shares of Lazlo common stock. This year, Elaine learned that Lazlo is in bankruptcy and can pay only 40% of its outstanding debt to its creditors. What are the tax consequences to Elaine of Lazlo's bankruptcy?

Question

Quizplus · Accepted Answer

Elaine's loss is calculated based on the original purchase price of the shares ($10 per share for 2,000 shares equals $20,000) minus the value of the shares after the bankruptcy, which is $0 because shareholders typically recover nothing when a company goes bankrupt and pays only a portion of its debts to creditors. This results in a $20,000 long-term capital loss, assuming she held the shares as a capital asset for more than one year.

Ten Years Ago, Elaine Paid $10 Per Share for 2,000