Ongoing Corporation

• The most common form of liquidating stock occurs when an investor sells shares of stock to make a profit or to cut losses. Publicly traded stocks are sold through stock brokers, and the sales are governed by the Securities and Exchange Commission. Sales of stock of privately held companies can be sold directly from one investor to another. In either case, if the sale price is higher than the investor's purchase price, the capital gain is taxable. A sale price that is less than the investor's purchase price results in a capital loss. A capital loss is deductible on the investor's federal tax return to offset capital gains. If there are no capital gains, the Internal Revenue Service restricts capital losses to a maximum of $3,000 per year. Any additional losses carry forward into future years.
  
  

Fractional Shares

• Fractional shares often occur when one corporation buys another corporation and exchanges its stock to shareholders of the purchased corporation, For example, corporation A buys corporation B and issues three shares of its stock for every four shares of surrendered stock. Shareholder C owns 13 shares of corporation B stock. Shareholder C receives nine and one-quarter shares of corporation A stock. This quarter share fraction is usually liquidated and the shareholder receives the cash equivalent. If the value of corporation A stock, including the fractional share, is greater than shareholder C's purchase price (basis) of the surrendered stock, the fractional share distribution is a taxable capital gain. If it is less than the shareholder's basis, the distribution is a non-taxable return of capital.
  
  

Closing a Corporation

• Liquidating distributions result when a corporation closes part of the company or completely closes the company. The directors sell the net assets and distribute the cash to the shareholders. A liquidating distribution is a non-taxable distribution unless a shareholder receives more cash than his basis in the stock. Any amount above the basis is taxable as a capital gain.
  
  

Capital Gains and Losses

• If a shareholder holds stock for one year or less before liquidation, the IRS treats any capital gain or loss as a short-term gain or loss. Short-term capital gains are treated as ordinary income, taxed at the shareholder's marginal tax rate. Liquidation of stock shares held for longer than one year is treated as a long-term capital gain or loss. Long-term capital gains are taxed at the capital gains rate, which is often lower than the shareholder's marginal rate. Short term and long term capital losses are both restricted to offsetting capital gains and to the maximum of $3,000 capital loss deduction per year.