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1. The rules for ISOs prevent the taxation of the option as income at the time the option is granted or when the employee exercises the option. The taxable event occurs when the stock is sold. In this case you will have a $2800 capital loss assuming the stock is completly worthless.

Yes, the stock is completely worthless as the company no longer exists. However, I am not sure where/how to report this $2800 capiltal loss.

2. I need more information to answer.
What kind of options?
How much did he pay?
What was he taxed on?

What kind? I am not sure. He paid 1 cent per share. He was given 140 options but "sold" 50 immediately for tax, thereby leaving him with 90. He still holds these 90 options.

Thanks for any help you can give.

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