[metamatt]

The example you gave is pretty unlikely: (a) someone gives you a million dollars in stock and (b) you didn't know that was coming to prepare for it and (c) the stock immediately goes to 0 before you can sell it. Just noting that.

Still, this would likely end up in separate buckets. Someone giving you a million dollars in stock very likely counts as income, not capital gains. You'll have a tax liability for $1MM in income. Then, should it actually go to zero, you've got a $1MM capital loss. In general, capital losses are not fully deductible against income, only capital gains. I hope you also had a $1MM capital gain so you can do something with the loss...

But again, this case is pretty contrived. Likely if you're getting a large amount of stock like in this example, you know it's coming, and can decide what to do about it before it suddenly goes to 0. (Hint: holding onto it is deciding to let it ride.)

How can this possibly be what the tax code says? It just is.