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A friend bounced this question off me the other day and I don't know the answer. I asked TMFSelena and she was stumped as well.

Let's say I short a company 1000 shares @ $10/share. I now have roughly $10,000. The company hits hard times and ends up in Chapter 7 bankruptcy....the stock goes to $0.

Do I have to ever cover? What's the price? If I don't cover when do I recognize the income for tax purposes?

Anyone out there know the rules on this?
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