The conversion of coal to a clean fuel through liquefaction requires the physical separation of undissolved sulfur‐rich mineral matter. The hydrogenation‐liquefaction reaction produces residual solids in which the original coal impurity pyrite, FeS2, has largely been converted to pyrrhotite, Fe1−xS, which is a complex non‐stoichiometric sulfide. Using thermomagnetic analysis and Mo¨ssbauer spectroscopy we show that the iron sulfide in coal liquefaction residues corresponds to an intermediate pyrrhotite. Striking transformations between various magnetic and non‐magnetic states are induced by thermal treatments in inert or sulfidation atmospheres. The kinetics of the transformations are strongly influenced by prior thermal and atmosphere history. Transformation to a high magnetization state has practical application wherein magnetic separation techniques become attractive for the liquid‐solids separation step in coal liquefaction.