You buy a bond B0 during a bankruptcy. Subsequently, the company emerges from bankruptcy and the following takes place:
1) B0 is declared worthless
2) A new bond B1 is created and given to old bondholders, with new terms and conditions
3) Some ordinary shares S1 are created and given to old bondholders
How do you do the tax accounting for this? The scenarios that I see:
A) You can declare a tax loss on B0, then hold B1 and S1 with a cost basis of $0
B) You can take no loss on B0, and simply adjust the cost basis of B1 and S1. But if you adjust the cost basis then it's open to some interpretation about how to divide the value of B0 across the two new securities.
What is the correct procedure for this case?