I held N shares of a company "JUNK", average cost basis $C/share.
Cost basis for the shares was
$C * N.
Some time later, company "JUNK" filed for Chapter 11 bankruptcy.
At this point, the stock was listed at price of zero.
A Chapter 11 plan was approved by the judge, in light of the fact that the company had recoverable assets (mostly via litigation against senior management).
The Plan, as approved by court, included distribution to pre-Chapter-11 equity holders of any assets from Recovery Trust, left after higher-priority payouts (administrative expenses, secured and unsecured creditors etc...)
At the end of the execution of the plan, the Recovery Trust held some money, which amounted to $C2 per share on average, distributed to equity holders.
As such, i'm entitled to distribution of
$C2 * N.
Question: What would be the tax calculations?
Would the Plan distribution of
$C2 * Nbe considered capital gains on that stock, same as if I simply sold the original stock for $C2/share?
In other words, if $C2 is more than $C (original cost basis), I would pay long-term investment taxes on
($C2-$C) * N; and if $C2 is less than $C, I would be able to write off
($C-$C2)*Nfrom my capital gains otherwise?
Or, would the distribution be separate investment income?
If so, would I be able to write off the loss of original
$C*Ninvestment and how? Does the fact that it has been several years since bankruptcy matter? (not sure if this should be a separate question).
Would the distribution be taxed as long or short term capital gains?
Or, would the distribution be separate non-capital-gains, and taxed like regular income?